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A company has a $500 book value and a $600 market value. Its book value D/E ratio is 1.0 and its market value D/E ratio is 0.80. Its book value cost of debt is 9% and its book value cost of equity is 24%. The market cost of debt is 12% and the market cost of equity is 28%. It is considering a $100 million expansion. It can borrow at the current cost of debt without increasing its cost of equity, but if it funds the expansion using a D/E ratio higher than its market value D/E ratio, the cost of equity will increase to 30%. It tax rate is 40%
What is the mixture of debt and equity used to fund the expansion if its funds it using the market value D/E ratio?
Calculating Present Values. Suppose you are committed to owning a $225,000 Ferrari.
Calculate the required return for a stock which expects to pay a dividend of $1.50 this year. The dividends are growing at 2%, and the stock currently trades at $34.50 per share. What is the dividend yield and capital gains yield?
A financial company that advertises on television will pay you $61,000 now for annual payments of $9,400 that you are expected to receive for a legal settlement over the next 11 years. Assume you estimate the time value of money at 12 percent.
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 11 percent, –11 percent, 18 percent, 23 percent, and 10 percent. Suppose the average inflation rate over this period was 2 percent and the average T-bill..
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 79,000 2 92,000 3 106,000 4 101,000 5 82,000 Production of the implants will require $1,580,000 in net working capital to sta..
Your firm is considering developing an apartment complex. The firm owns land that could be used for the project; it was bought last year for $500,000. Real estate has gone up sharply in the last year: the land could be sold today for $625,000. Fixed ..
Write a letter to Emily in which you explain how she would treat her losses for tax purposes.
Which of the following is not a primary benefit of mutual funds?
Consider a new line of equipment that will cost $760,000 and will save a company $160,000 in operating expenses for the next ten years. It will not affect sales, but it will result in an increase in Net Working Capital of $60,000. Calculate the NPV a..
The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). Suppose that today you buy a bond wit..
L.A. Clothing has expected earnings before interest and taxes of $1,800, an unlevered cost of capital of 12 percent and a tax rate of 33 percent. The company also has $2,500 of debt that carries a 6 percent coupon. The debt is selling at par value. W..
What will be the expected minimum price in light of the dividend payment logistics?
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