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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?
Calculate the beginning-of-year balance for gross fixed assets. Calculate the interest expense for Moore’s HoneyBee Corp.
Gretchen Gallup has been developing genetically modified, six-legged polo ponies in her spare time.
If asset A has a standard deviation of .2 and asset B has a standard deviation of .2, then any portfolio that involves positive investment in both asset A and asset B will also have a standard deviation of .2. For most firms, market value leverage is..
During 2011, Lele Design earned net income of $250,000. The firm neither bought nor sold any capital assets. The book value of its assets declined by the year’s depreciation charge of $200,000. The firm’s operating cash flow for the year was $450,000..
You are evaluating a project that requires an initial investment of $225,000 and has equal annual cash inflows of $85,000 each year for the next five years. What is the payback period?
Post Card Depot, large retailer of post cards, orders 8,233,220 post cards per year from its manufacturer. What is annual carrying costs of post card inventory?
Find the total length of the loan and the amount of the final payment.
Diversifiable risk is the risk that remains after diversification.
The risk-free rate is 3%, the expected market rate of return is 9%, if you expect a stock with a beta of 1.5 to offer a rate of return of 12%, you should. You are considering acquiring a common stock that you'd like to hold for one year. You expect t..
What is the Herfindahl-Hirschman Index (HHI) for the industry? Is the industry considered highly concentrated, moderately concentrated, or not concentrated?
What is the present value of the payments if they are in the form of an ordinary annuity?
Discounted payback method of capital appraisal ignores cash flows beyond the discounted payback period. The net present value is found by discounting all positive cash flows at the project’s cost of capital. The project is accepted if the IRR is less..
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