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Assume Gillette Corp will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 11.5% per year thereafter until the 5th year. Thereafter, growth will level off at 2.1% per year. According to the dividend-discount model, what is the value of a share of Gillette stock if the firms equity cost of capital is 8.8%?
The value of Gillette's stock is $_________ (Round to the nearest cent.)
Suppose an individual invests $40,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 4.4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating e..
Suppose the real interest rate is 6 percent and the expected inflation rate is 2 percent. What would you expect the nominal rate of interest to be?
Discuss the following statement: “If a firm has only independent projects, a constant WACC, and projects with normal cash flows, then the NPV and IRR methods will always lead to identical capital budgeting decisions.” What does this imply about the c..
Assume that you are the CFO of a Company contemplating a stock repurchase next quarter. You know that there are several methods of reducing the current quarterly earnings which may cause the stock price to fall prior to the announcement of the propos..
How could the Internet help you to research an investment? Describe how the securities industry is regulated. What are four general sources of funds? Audit standards require the auditor to consider the combined amount of misstatement early in the au..
The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $95,000, and it would cost another $91,000 to modify it for special use. What is the net cost of the machine for capital budgeting purpo..
A for-profit firm must adjust the cost of debt for the tax benefit associated with its deductibility (multiply by 1-T). A not-for-profit firm also needs to adjust the debt to an after-tax basis even though it does not pay taxes (by using the tax rate..
Laurel’s Lawn Care, Ltd., has a new mower line that can generate revenues of $180,000 per year. Direct production costs are $60,000, and the fixed costs of maintaining the lawn mower factory are $25,000 a year. Calculate the operating cash flows of t..
Assume that interest rate parity holds. The U.S. one-year interest rate is 10% and the Australian one-year interest rate is 8%. What will the approximate effective yield be for an Australian citizen of a one-year deposit denominated in U.S. dollars? ..
Consider the Comparable Company Analysis, Discounted Cash Flow Analysis (DCF), Precedent Transaction Analysis, and Leverage Buyout Analysis (LBO) valuation methods. Which one do you think is the most effective and why?
Your firm is contemplating the purchase of a new $642,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. Suppose your required return on the project is 8 percent and your pretax cost sa..
nvestors require a 15% rate of return on Levine Company's stock (that is, rs = 15%). What is its value if the previous dividend was D0 = $2.25 and investors expect dividends to grow at a constant annual rate of (1) -3%, (2) 0%, (3) 3%, or (4) 13%? Ro..
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