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Christopher William, president of William Industries which produces widgets, has hired you to determine its cost of debt and the cost of equity capital. The stock currently sells for $25 per share and the dividend will be $5. Christopher argues that it will cost us $5 per share to use the stockholders money this year therefore the cost of equity is equal to 20%. Furthermore, Christopher believes that the cost of debt is 25%. This is based upon the most recent financial statements which show that William Industries has total liabilities of $10 million and will face total interest expenses for the year of $2.5 million. Christopher argues that the company should increase its use of equity financing because debt costs 25% while equity only costs 20% and thus equity is cheaper. Is Christopher’s analysis of the cost of equity, debt, and decision to increase the use of equity financing over debt financing accurate?
Calculate the expected return. Calculate the standard deviation.
Due to increasing value of the Yuan the Chinese electronics manufacturers have been suffering losses. At the same time the cost of a rare-earth mineral used in production of their goods has been increasing steadily due to increasing demand. You have ..
Consider the different uses of free cash flow to a firm. Which use is the most optimal? Does the cost of capital matter in your decision? Defend your answer and cite your sources.
Assume that the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are relevant data estimates.
Electronic Timing, Inc. (ETI), is a small company founded 15 years ago by electronics engineers Tom Miller and Jessica Kerr. ETI manufactures integrated circuits to capitalize on the complex mixed-signal design technology and has recently entered the..
Instead of increasing its long-term debt by borrowing money from a bank to purchase new stereo equipment, Jay's Jams Inc. decides to lease the equipment on a long-term basis. How will the long-term debt ratio differ if the lease option is selected ov..
Buffelhead's stock price is $234 and could halve or double in each six-month period (equivalent to a standard deviation of 96%). Assume that you own an American put option on Buffelhead stock with an exercise price of $234. The interest rate is 19% a..
What is the dollar-weighted duration of the bank's liability portfolio if the bank wants to maintain zero leverage - adjusted duration gap?
A) Assume the following: Euro spot = Euro 0.8115/$1.00; SwF spot = SwF 1.4260/$1.00; and Euro/SF spot = Euro 0.5625/SwF 1.00. Assume you have $1,000,000 available for arbitrage transactions. Show how you can make arbitrage profits at these spot rates..
After reading this chapter, it isn't surprising that you're becoming an invest- ment wizard. With your newfound expertise, you purchase 100 shares of KSU Corporation for $37 per share. In both cases, assume you are in the 25 percent federal marginal ..
To boost a sluggish economy, China’s central bank recently cut interest rates and lowered reserve requirements. How would these new developments affect the US monetary policy? Explain.
Justify whether the standard deviation or covariance is the most significant measurement when adding a risky asset to an already highly risky portfolio. Provide support for your justification.
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