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a. Two investors are evaluating GE stock for purchase. They both agree onthe expected value of D0, g and K. However, one investor has a 2 year horizon and the other has a 5 year horizon. On the basis of the type of analysis done in this chapter, they should both be willing to pay the same price . (True or False-Explain)
b. A bond that pays interest forever and has no maturity date (perpetual or consol bond) is similar to a 1) no growth common stock and 2) a preferred stock in what ways?
The book value of Little Statistic’s total assets is $400,000. Suppose Number Crunching Inc. acquires Little Statistic’s assets for $1 million and finances the purchase by selling $600,000 in new stock, $300,000 in new debt, and reducing cash by $100..
Suppose you know that a company's stock currently sells for $63 per share and the required return on the stock is 10.5 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If ..
Safe Bulkers is considering the purchase of a used bulk carrier for $8 million. The forecast revenues are $5 million a year and operating costs are $ 4 million. Maintenance expenses costing $2 million will be required after both the 5th year and 10th..
Assume an economy in which there are three securities: Stock A with rA = 10% and σA = 10%; Stock B with rB = 15% and σB = 20%; and a riskless asset with rRF = 7%. Stocks A and B are perfectly negativly correlated (rAB = -1). The expected return on th..
Juggernaut Satellite Corporation earned $18 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30 percent of its earnings as annual, end-of-year di..
Seattle Health Plans currently uses zero-debt financing. Its operating income (EBIT) is $1 million, and it pays taxes at a 40% rate. It has $5 million in assets and, because it is all-equity financed, $5 million in equity. What impact would the new c..
Like most ABS, Sequential-Pay CMOs are structured to tranche the default exposure of the underlying assets to make the resulting securities that the SPV issues attractive to different segments of the investor universe. (True or False?) Explain
Expected Return If a company's current stock price is $26.50 and it is likely to pay a $2.25 dividend next year. Since analysts estimate the company will have a 15% growth rate, what is its expected return?
Assume that your cousin holds just one stock, Eastman Chemical Bonding (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified..
Which of the following is an example of an annuity? Any investment in a CD or a lump sum payment made to life insurance company that promises to make a series of equal payments later for some period of time
A factory costs $498,400. You forecast that it will produce cash inflows of $200,074 in year 1, $155,000 in year 2, and $340,000 in year 3. The discount rate is 10.50%. Calculate the PV of cash inflows. Should the company invest in the factor?
Capital gains taxes Perkins Manufacturing is considering the sale of two nondepreciable assets, X and Y. Asset X was purchased for $2,000 and will be sold today for $2,250. Asset Y was purchased for $30,000 and will be sold today for $35,000. The fir..
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