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You are provided the following information of a firm's stocks and bonds along with other pertinent information.
The stocks have a standard deviation of 50% and a correlation of 0.6 with the market index.
The risk-free rate is 2%, and the market risk premium is 7%. The standard deviation of the market is 25%.
The firm just paid dividends of $2.50 per share. Assume that the firm pays dividends annually and that the firm adjusts its dividends to maintain a constant dividend payout ratio of 75%. The ROE of the firm is 15%.
What is the beta of the stock?
What is the cost of equity? [Hint: Use the CAPM]
What is the rate of growth in dividends? What is the stock price? [Note: the answer from part (a) would be your discount rate]
How useful (or limited) is this method in valuing stocks? [1-2 sentences]
Assume that the risk-free rate is 4.5% and that the market risk premium is 3%. What is the required rate of return on a stock with a beta of 1.2? What is the required rate of return on a stock with a beta of 1.1? What is the required return on the ma..
What are some key financial differences between the three companies in the simulations? What primary advantages does your company bring to the table in a potential merger or acquisition? What sources of synergy are possible in your two potential tran..
What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?
To help finance a major expansion, Castro Chemical Company sold a no callable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semi-annually, sells at a price of $875, and has a par value of $1,000. ..
Mattel Inc.’s 2011 financial statements show operating profit before tax of $1,041,101 thousand, net income of $768,508 thousand, provision for income taxes of $202,165 thousand and net non operating expense before tax of $70,428 thousand. Mattel’s s..
The difference between the yield to maturity and the yield to call is that yield to maturity is the presumed yield an investor will earn if they hold a bond until it is called. Yield to call is the presumed yield an investor will earn if they buy the..
Write a memo to your supervisor explaining the cash conversion cycle at your company, a manufacturer of plastic toys. Be sure to address the following: Material ordering costs, Labor costs, Credit sales (accounts receivables)
Inflation has remained low for the past three years but you have come to the conclusion that trend is ending and inflation will increase significantly over the next 18 months. Assume you have reached this conclusion prior to other investors reaching ..
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Birds of a Feather has 10-year bonds outstanding that carry an annual coupon of 8 percent. The bonds mature in 7 years and are currently priced at 110 percent of face value. What is the firm's pretax cost of debt?
Explain how purchase of the apple press might affect the company's revenue goals. Based on this information, explain whether Anthony's Orchard should invest in the apple press.
The coupon rate and market price for the 10-year US Treasury bond are 2.50% and 96.3828 respectively. Note, the price is expressed as a percentage of par (like other bonds). If par is $1000, then this bond is selling for $963.828. Assume that this bo..
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