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Both Dow Chemical Company, a large natural gas user, and Superior Oil, a major natural gas producer, are thinking of investing in natural gas wells near Houston. Both are all equity financed companies. Dow and Superior are looking at identical projects. They’ve analyzed their respective investments, which would involve a negative cash flow now and positive expected cash flows in the future. These cash flows would be the same for both firms. No debt would be used to finance the projects. Both companies estimate that their projects would have a net present value of $1 million at an 18 percent discount rate and a −$1.1 million NPV at a 22 percent discount rate. Dow has a beta of 1.25, whereas Superior has a beta of .75. The expected risk premium on the market is 8 percent, and risk-free bonds are yielding 12 percent. Should either company proceed? Should both? Explain your answer.
Bank purchased bonds two years ago. These bonds have a par value of $300 million and a coupon rate of 4.75 percent. As of today, they have seven years until they mature. Investors today are requiring a 5 percent yield to maturity. What should be the ..
Pacific Packaging's ROE last year was only 3%; but its management has developed a new operating plan that calls for a debt-to-capital ratio of 50%, which will result in annual interest charges of $720,000. Under these conditions, the tax rate will be..
The Joseph Company has a stock issue that pays a fixed dividend of $3.00 per share annually. Investors believe the nominal risk-free rate is 4 percent and that this stock should have a risk premium of 6 percent. What should be the value of this stock..
The shareholders of Motive Power Corp. need to elect four new directors to the board. There are 14,700,000 shares of common stock outstanding, and the current share price is $11.00. If the company uses cumulative voting procedures, how much will it c..
What problems might you encounter in marketing such a fund?
Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .092, E(RB) = .152, σA = .362, and σB = .622. a-1. Calculate the standard deviation of a portfolio that is composed of 37 percent A and 63 percent B when the correlati..
The capital gains yield plus the dividend yield on a security is called the:
powertool is the largest us manufacturer of industrial hand tools. its sales force is strong but clients have
How much of his contribution is deductible in the year of his gift?
Fred was on the seven year plan at the University of South Carolina and racked up $65,000 in student loans, which carry an annual interest rate of 8.5 percent.
What is the net present value of the estimated extra net income from the new robot.
Suppose the spot exchange rate for the Hungarian forint is HUF 205.54. The inflation rate in the United States will be 2.6 percent per year. It will be 5.6 percent in Hungary. What do you predict the exchange rate will be in one year? What do you pre..
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