Reference no: EM132963123
Questions -
Q1. Hook'n Sinker, a maker of fine fishing gear is growing 30% per year. The company has total assets of $1 million and is all-equity financed. Its return of equity is 25%. Its plow-back ratio is 40%.
a) What is the internal growth rate?
b) What is the firm's external financing need this year?
c) By how much would the firm increase its internal growth rate if it reduced the payout ratio to zero?
d) How much would such a move change the need for external financing, that is, how much external financing would now be needed?
Q2. ABC, Inc. has just completed its IPO. It raised $2 million by selling 200,000 shares of common stock to the public. These are the only shares outstanding. The par value of each share was $2. Calculate the following:
a) Common shares @ par value
b) Additional paid-in capital
c) Retained earnings
Q3. ?Virtual Excursions, Pty is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12%, and the rate of interest on the bond is 6%. The bonds are default-free and that there are no taxes.
Assume that the company issues more debt and uses the proceeds to retire equity. The new financing mix is 60% equity and 40% debt. If the debt is default-free.
a) What will be the expected rate of return on equity?
b) What will be the expected return on the package of common stocks and bonds?
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