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Show that a firm with earnings of $10,000 a year in perpetuity would be better off paying all earnings in dividends rather than investing 25% of its earnings (also in perpetuity) in projects earning 14% if its discount rate is 15%
One day (i.e. Day 0), you opened a long position on a current month stock futures contract on Stock Y at a settlement price of $35.50. The contract multiplier was 1,000. The initial margin and the maintenance margin for the contract were $6,400 and $..
Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in the foreseeable future. The required rate of return is 11%..
Suppose Palmer Properties is considering investing $2.6 million today (i.e., C0 =-2,600,000) on a new project that is expected to last for 7 years. What is the payback period for the project? What is the net present value of the project? What is the ..
Consider a firm with an EBIT of $10,500,000. The firm finances its assets with $50,000,000 debt (costing 6.5 percent) and 10,000,000 shares of stock selling at $10.00 per share. Calculate the change in the firm’s EPS from this change in capital struc..
Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a coupon rate of 6%, paid annually. Today, the debt is selling at $1,130. If the firm’s tax bracket is 30%, what is its after-tax cost of debt?
Tri-County Inc. pays an annual common stock dividend of $1.80 per share. The dividend has shown a constant growth rate over the past 5 years from $1.10 to its present level. This growth trend is expected to continue. The company's dividend payout rat..
Consider the expectations theory (of the term structure) with a term premium. What is the interest rate on a 5-year bond today if the term premium for a 5-year bond is 2% and 1-year interest rates are expected to remain constant at their current leve..
Suppose you invest $20,000 of your own money in a business as a sole proprietor, and then borrow an additional $10,000. Suppose the business fails. Which of the following describes your situation, and what is your total loss?
It will cost $4,000 to acquire a small ice cream cart. Cart sales are expected to be $3,200 a year for five years. After the five years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the pa..
Ignatius Corporation had 7 million shares of common stock outstanding during the current calendar year. It issued ten thousand $1,000, convertible bonds on January 1. Each bond is convertible into 50 shares of common stock. Ignatius has an effective ..
Suppose the average return on Asset A is 6.3 percent and the standard deviation is 7.5 percent and the average return and standard deviation on Asset B are 3.4 percent and 3.0 percent, respectively. In a particular year, the return on Asset A was −4...
Klondike Pharmaceuticals has several herb extractor evaporators that were purchased four years ago at a price of $20,000 (you can ignore inflation). These machines currently require annual maintenance costs of $2,000. The machines could be sold, as i..
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