Reference no: EM132247993
Answer the following Questions:
Question 1 : A stock pays an annual dividend of $2.50 and that dividend is not expected to change. Similar stocks pay a return of 10%. What is P0? (Show workings)
Question 2 : A stock has just paid a dividend and has declared an annual dividend of $3.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 14%. What is P0? (Show workings)
Question 3 : What is β and why is it important to investors and issuers of stock? Describe the behavior of stocks with βs of greater than one, less than one, and less than zero.
Question 4 : A companyhas 30 million shares outstanding trading for $8 per share. It also has $90 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 9%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital? (Show workings)
Question 5 : What is the difference between capital structure and capital budgeting? Explain and give an example of a capital structure decision and an example of a capital budgeting decision.
Question 6 : (TCO E) A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 15%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work.
|
Year
|
A
|
B
|
C
|
|
0
|
-300
|
-100
|
-300
|
|
1
|
100
|
50
|
100
|
|
2
|
100
|
100
|
100
|
|
3
|
100
|
100
|
100
|
|
4
|
100
|
100
|
100
|
|
5
|
100
|
100
|
100
|
|
6
|
100
|
100
|
100
|
|
7
|
100
|
200
|
0
|