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Paula Worth, a private wealth advisor who saw your analysis of LewCo, approaches you with an idea. She says that your $1000 investment in 20 shares produces a cash flow stream of $63 next year with 5% growth per year. Using leverage (borrowing) she proposes to increase the cash flow fivefold (after fees) to $315 the first year with 5% growth after that. She argues that the value of this investment is $5,000 based on the r* = 11.3%, but it only costs you $1000.
a. Use the formulas from class to illustrate how Paula arrived at the value of $5,000.
b. What mistake did she make in applying the formula?
c. What might Modigliani-Miller say about your paying Paula Worth a fee for this service?
You recently purchased a stock the is expected to earn 30 percent in a booming economy, 9 percent in a normal economy, and lose 33 percent in a recessionary economy. There is a 5 percent probability of a boom and a 75 percent chance of a normal econo..
Hal Carney-Trish Protura are two Web and software engineers seeking financial backing for further development of social networking technology they have created
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As a newly hired assistant manager of Quigley Company, you need to decide whether or not project S should be taken. The project requires an initial investment of $1 million, and it will generate $250,000 in revenue in the first year. The current 3-mo..
A stock you are buying today promises no dividends for a long time. In exactly 5 years the stock will pay its first dividend of $2.30. At that time you also believe the stock could be sold for $43.00. If today you can buy the stock for $28.95, what i..
A 182-day $14 million negotiable CD has a 5.00% annual rate quote. It is currently selling at par as market rates are 5%.
The 8.50 percent preferred stock of Ajax Unlimited is selling for $92.30 a share. What is the cost of preferred stock if the risk-free rate is 3.95 percent?
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