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ABC and XYZ are identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 10%. Both firms expect EBIT to be $95,000 and all income will be distributed as dividends. Ignore taxes. a. Richard owns $30,000 worth of XYZ stock. What rate of return is he expecting? b. Show how Richard could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage. c. Now assume ABC and XYZ each pay a 20% marginal corporate tax, but Richard pays no taxes. Repeat a) and b). How is the outcome different than in a) and b)? Explain. Which firm would Richard prefer to invest in? Why? d. Now assume ABC and XYZ each pay a 20% marginal corporate tax, and Richard pays a 15% tax on dividends. Repeat a) and b). How is the outcome different than in a), b), and c)? Explain. Which firm would Richard prefer to invest in? Why?
How much dividend income will you receive on July 31st as a result of your ownership of BuyLo stock?
Valuation of a Stock Through the Gordon Growth Model:
Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has five years to maturity, whereas the Hardy Corp. bond has 18 years to maturity...
Eileen Mahurin is the director of a major charitable organization in Knoxville, Tennessee. A single mother of one young child, she earns what could best be described as a modest income. Because charitable organizations aren’t known for their generous..
The hospotial wants to allocate the service department costs to the revenue areas. Allocate the service department with the largers dollar value first.
The balance will be financed over three years. If the interest rate is 8.5% per year, compounded monthly, what are the monthly payments?
Calculate the future value of an investment, given the following characteristics: (a) PV: $30,000, (b) NPER: 25, (c) Rate: 5%. Using the information from Problem 1, calculate the future value of the same investment using daily compounding
If the required rate of return on the preferred stock is 6 percent, what is the fair present value of the stock?
Find the required return on the new project that firms X is considering.
Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot rate of the S$ is $.50, and the Singapore interest rate is 2% over 90 days. Suggest how the U.S. firm could implement a money market hedge. Be precise..
What is its return on stockholders’ equity? what will be the new return on stockholders’ equity?
When projecting growing cash flows into perpetuity, the estimate should take into account the extra amount required for investment consistent with any projected growth in operating profit. (True, False, Uncertain and explain your response)
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