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Eureka Ltd, is a rapidly growing chain of retail stores. A security analyst’s report indicates that debt yielding 8% composes 25% of Eureka’s overall capital structure. Furthermore, Eureka’s dividends are expected to grow at a rate of 9% per year. Currently, common stock in the company is priced at $30, and it should pay $1.50 per share in dividends during the coming year. The risk free rate is currently equal to 2% and the expected return on the SP 500 index is 10%. The company’s estimated beta is 1.5. a. Calculate Eureka’s cost of equity using dividend growth model b. Calculate Eureka’s cost of equity using the capital asset pricing model c. Assuming a 40% tax rate, calculate Eureka’s weighted average cost of capital.
Which of the following would cause dividends to decrease if the firm was using the residual dividend model?
The returns on stocks A and B are perfectly negatively correlated (\rho_{AB} = -1). Stock A has an expected return of 21 % and a standard deviation of return of 40%. Stock B has a standard deviation of return of 20%. The risk-free rate of interest is..
Energizer Battery Manufacturers had sales of $2,000,000 in 2010 and their cost of goods sold represented 75 percent of sales. Selling and administrative expenses were 10 percent of sales. Depreciation expense was $100,000 and interest expense for the..
Alex plans to purchase a callable bond of Horizon Inc. The bond is 20-year to maturity, carry 10.5% annual coupon, paid semi-annually, and have a$1,000 par value. The bond is selling now for $1,187.40 each. The bond can be called back in 5 years at a..
Discuss and analyse all the issues in order, and any other implications arising from this scenario for presentation to Mark Golledge .
Suppose the spot exchange rate for Narnianly currency is trading for $2/N and one year later it can go up to $2.5/N, an increase of 25 percent, or down to $1.80/N, a decrease of 10 percent. assume intiallly that the U.S. interest rate is 1 percent an..
Identify whether each of the following is an operating, investing, or financing cash outflow or inflow or if it is a noncash flow, under GAAP.
Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects its credit sales 30% in the month of sale, 60% one month after the sale, and 10% two months after the sale. What are Matterhorn's total cash receipts for the month ..
You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .75, -1.2, .90, 1.3, 1.5. The risk free return is 4% and the market return is 9%. (Not a multiple choice problem) Compute the beta o..
Company has an average collection period of 34 days and factors all of its receivables immediately at a 3.1 percent discount. Assume all accounts are collected in full. What is the firm's effective cost of borrowing? Identify which of the following w..
First Simple Bank pays 9 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 1..
LIS Company has $50 million in long-term debt, $75 million in shareholder’s equity [both figures are market value basis]. The cost of equity is 14%, cost of long-term debt is 12% and the tax rate is 25%. What is the weighted average cost of capital [..
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