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Consider two stocks. For each, the expected dividend next year is $100 and the expected growth rate of dividends is 3%. The risk premium is 3% for one stock and 8% for the other. The economy's safe interest rate is 5%.
a. What does the difference in risk premiums tell us about the dividends from each stock?
b. Use the Gordon growth model to compute the price of each stock. Why is one price higher than the other?
c. Suppose the expected growth rate of dividends rises to 5% for both stocks. Compute the new price of each. Which stock's price changes by a larger percentage? Explain your result.
The process of selecting among potential major corporate investments is called capital budgeting. The goal of the capital budgeting decisions is to select capital projects that will decrease the value of the firm.
A stock, currently trading at $50, expects to pay a $4.50 dividend this year. The dividends and stock price has been growing at 8% for 10 years. What is the expected return on the stock this year?
When evaluating projects using NPV approach ____
A bond that settles on June 7, 2013, matures on July 1, 2033, and may be called at any time after July 1, 2023, at a price of 146. The coupon rate on the bond is 6.8 percent and the price is 160.00. What is the yield to maturity and yield to call on ..
Matsumoto Limited (ML), a large conglomerate firm. Compute the marginal cost of capital schedule for ML, and determine the break points in the schedule.
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $760 per set and have a variable cost of $320 per set. The company has spent $126,000 for a marketing study that determined the company will sell 24,000 sets per year ..
Regarding option Greeks, which of the following statements are true and why?
A local finance company quotes an interest rate of 15.6 percent on one-year loans. So, if you borrow $36,000, the interest for the year will be $5,616. Is the interest rate on this loan 15.6 percent? What rate would legally have to be quoted? What is..
McKenna Sports Authority is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $847,500, and $1,230,000 over the next three years. What is the payback period ..
Explain, with examples, the key factors to be considered when formulating a working capital funding policy?
Analyze the Capital Asset Pricing Model (CAPM). Using the course text and an article from ProQuest as references, address the following: Explain how the CAPM assists in measuring both risk and return. Identify the benefits and drawbacks of using the ..
comparing public and private budget preparation strategies
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