Homework Answers
7. The current answer to the question is (a). The formula for PE ratio is Market price / earnings per share. Lets assume stock price is $100 and if PE is 10, it means EPS is 10. This suggests that if an investor invests $100 in the stock, it will take 10 years of $10 dividend to get back his or her initial investment of $100.
8. The correct answer to the question is (c). Under sinking fund method, the firm is allowed to retire a fixed number of preferred shares from its current number of preferred shares until all the shares are retired. This feature allows the firm to retire preferred shares through open market instead through call.
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Assume that a firm distributes all of its carnings as dividends. Which of the following is...
How can a firm effectively incorporate a maturity provision within a preferred stock issue? By including a preempt...
How can a firm effectively incorporate a maturity provision within a preferred stock issue? By including a preemptive right By including a voting provision By including a participating provision By including a call provision By including a cumulative dividends provision Assume that a firm distributes all of its earnings as dividends. Which of the following is indicated by a price- earnings (P/E) ratio of 10? It would take 10 years for an investor to recover his or her initial investment...
Investment Theory: Assume corporate taxes as detailed in the following question: 6. An all-equity firm has...
Investment Theory: Assume corporate taxes as detailed in the following question: 6. An all-equity firm has 155,000 shares of common stock outstanding, currently worth $20 per share. Its equity holders require a 20% return. The firm decides to issue $1 million of 10% debt and use the proceeds to repurchase common stock. The corporate tax rate is 30%. a. What is the market value of the firm before the repurchase? b. According to Modigliani-Miller, what is the market value of...
Which of the following statements is correct? a. The tax code encourages companies to pay dividends...
Which of the following statements is correct? a. The tax code encourages companies to pay dividends rather than reinvest earnings. b. Companies may pay too high a price in a large open market repurchase if it takes too long to complete. c. An investor's capital gains from selling stock in a repurchase are always taxed at a higher rate than if the distribution were dividends. d. The stronger management thinks the clientele effect is, the more likely the firm is...
Chapter 14 - Dividends and Dividend Policy Saved The Quick Buck Company is an all-equity firm...
Chapter 14 - Dividends and Dividend Policy Saved The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $450,000 next year and $790,000 in two years, including the proceeds from the liquidation. There are 20,000 shares of stock outstanding and shareholders require a return of 12 percent. What is...
Use the Following Information for Questions 1 and 2. A firm currently has earnings of $2...
Use the Following Information for Questions 1 and 2. A firm currently has earnings of $2 per share and pays out 30% of earnings as dividends on its common stock. The after tax return on equity is 15%. The investor requires a 17% return. 1.What is the estimated growth rate of earnings and dividends? 2.Using the constant growth model, what is the intrinsic value of the common stock?$ 3. Three years from now you predict that a common stock will...
Name Date Principles of Finance Chapters 1 & 2 Week 6 11. Which of the following...
Name Date Principles of Finance Chapters 1 & 2 Week 6 11. Which of the following statements is correct? a. A warrant is basically a long-term option that enables the holder to sell common stock back to the firm at an agreed upon price, at a specified time in the future. b. Generally, warrants are distributed along with preferred stock in order to make the preferred stock less risky. c. If a company issuing coupon paying debt wanted to reduce...
Your firm is considering a new investment proposal and would like to calculate its weighted average...
Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.4 percent that is paid semiannually. The bond is currently selling for a price of $1,129 and will mature in 10 years. The firm's tax rate is...
Question 1 Firm Bullcat is an all-equity firm that has expected free cash flows of $10M per year ...
Question 1 Firm Bullcat is an all-equity firm that has expected free cash flows of $10M per year in perpetuity starting next year. The cost of capital for this unlevered firm is 10 percent. The firm has 5 million shares outstanding. Assume a perfect market. a) Construct the current market value balance sheet E+L in million dollars cash existing asset Total Asset Debt Equity Total E+ b) What is the current share price of Bullcat stock? Firm Bullcat is also...
#1 Van Buren, Inc., currently pays $2.24 per share in dividends on its common stock. Dividends...
#1 Van Buren, Inc., currently pays $2.24 per share in dividends on its common stock. Dividends are expected to grow at 7.00 % per year forever. If you require a 13.00 % rate of return (i.e., the discount rate) on this investment, what value would you place on a share of Van Buren common stock? Assume that the current dividend was just paid. Answer format: Currency: Round to 2 decimal places # 2 Bad Investment Incorporated has "promised" investors to...
7. Put the following in order of their claim on assets of a firm, starting with...
7. Put the following in order of their claim on assets of a firm, starting with the LAST to have a claim: A. Subordinated debentures B. Debentures (unsubordinated) C. Common Stock D. Preferred stock A) C, B, A, D B) C, D, AB CB, A, C, D D) D, C, B, A E) D, C, A, B 8. Croft Inc, bonds have a par value of $1,000. The bonds have a 4% coupon rate and will mature in 10 years....
How can a firm effectively incorporate a maturity provision within a preferred stock issue? By including a preemptive right By including a voting provision By including a participating provision By including a call provision By including a cumulative dividends provision Assume that a firm distributes all of its earnings as dividends. Which of the following is indicated by a price- earnings (P/E) ratio of 10? It would take 10 years for an investor to recover his or her initial investment...
Chapter 14 - Dividends and Dividend Policy Saved The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $450,000 next year and $790,000 in two years, including the proceeds from the liquidation. There are 20,000 shares of stock outstanding and shareholders require a return of 12 percent. What is...
Name Date Principles of Finance Chapters 1 & 2 Week 6 11. Which of the following statements is correct? a. A warrant is basically a long-term option that enables the holder to sell common stock back to the firm at an agreed upon price, at a specified time in the future. b. Generally, warrants are distributed along with preferred stock in order to make the preferred stock less risky. c. If a company issuing coupon paying debt wanted to reduce...
Question 1 Firm Bullcat is an all-equity firm that has expected free cash flows of $10M per year in perpetuity starting next year. The cost of capital for this unlevered firm is 10 percent. The firm has 5 million shares outstanding. Assume a perfect market. a) Construct the current market value balance sheet E+L in million dollars cash existing asset Total Asset Debt Equity Total E+ b) What is the current share price of Bullcat stock? Firm Bullcat is also...
#1 Van Buren, Inc., currently pays $2.24 per share in dividends on its common stock. Dividends are expected to grow at 7.00 % per year forever. If you require a 13.00 % rate of return (i.e., the discount rate) on this investment, what value would you place on a share of Van Buren common stock? Assume that the current dividend was just paid. Answer format: Currency: Round to 2 decimal places # 2 Bad Investment Incorporated has "promised" investors to...
7. Put the following in order of their claim on assets of a firm, starting with the LAST to have a claim: A. Subordinated debentures B. Debentures (unsubordinated) C. Common Stock D. Preferred stock A) C, B, A, D B) C, D, AB CB, A, C, D D) D, C, B, A E) D, C, A, B 8. Croft Inc, bonds have a par value of $1,000. The bonds have a 4% coupon rate and will mature in 10 years....
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