Explain plant and finances its construction by issuing stock

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Reference no: EM13214792

1. A company builds a new plant and finances its construction by issuing stock. Which ratio is least likely to be affected, all else being equal?

A. Debt to equity ratio
B. Current ratio
C. Net fixed assets to total assets
D. Debt to asset ratio

2. Grandma's Applesauce, Inc. has a 0.60 probability of a good year with operating cash flow of $50,000; and 0.40 probability of a bad year with operating cash flow of $30,000. The company has a debt of $35,000 with 8 percent interest due next year. Assuming the company has no means of servicing its debt other than operations, and a 0% tax rate, which of the following is true?

Shareholders expected claim is $12,200
Creditors expected claim is $37,800
Creditors expected claim is $34,680
None of the above

3. What is the risk premium for a stock where
the risk free rate is 5.1%
the equity market risk premium is 5.0%
the beta of the stock is 1.2

11.1%
6.1%
6.0%
12.1%

4. What is the expected return on a risky investment where
the risk free rate is 5.1%
the investment's beta is 1.4
the equity market risk premium is 5.0%
the cost of debt is 4.5%

10.8%
9.6%
12.1%
9.2%

Reference no: EM13214792

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