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Questions:
1. Andrew Inc is presently financed entirely by equity shares. The current market value is $600000. A dividend of $120000 has just been paid. This level of dividends is expected to be paid indefinitely. The project would be financed by issuing $500000 debentures at the market rate of 18%. Ignoring tax consideration:
(i) Calculate the value of equity shares and the gain made by the shareholders if the cost of equity rises to 21.6%.
(ii) Prove that weighted average cost of capital is not affected by gearing.
2. In considering the most desirable capital structure for a company, the following estimates of the cost of debt and equity capital (after tax) have been made at various levels of debt-equity mix:
Debt as a percentage of total capital employed
Cost of debt (%)
Cost of equity (%)
0
5.0
12.0
10
20
12.5
30
5.5
13.0
40
6.0
14.0
50
6.5
16.0
60
7.0
20.0
You are required to determine the optimal capital structure for the company by calculating weighted average cost of capital.
Calculate the expected return for the two stocks. Calculate the standard deviation for the two stocks.
Assume that the estimates of net worth are measured as of December 31st and that Mr. Trump’s investments have the same risk and leverage as REITs.
A stock is currently selling for $72 per share. A call option with an exercise price of $75 sells for $3.60 and expires in three months. If the risk-free rate of interest is 3.2 percent per year, compounded continuously, what is the price of a put op..
Calculate the incremental cash flows for 2016 and the subsequent years. Calculate the EOQ, number of orders issued per year, and inventory cost.
Explain why a flight to quality occurred following the subprime collapse and how this affected the interest rates on lower-quality corporate bonds and Treasury bonds.
What is the loss or gain to a Swiss investor who holds this bond for a year? What is the loss or gain to a U.S. investor who holds this bond for a year?
What is the accumulated sum of the following stream of payments? $13,782 every year at the beginning of the year for 8 years, at 9.34 percent, compounded annually.
Compute what would have been the risk of their portfolio if they had replaced that stock with risk-free government bonds yielding
Calculate the PV of the individual cash flows using the algebraic method.
Yield to call It is now January 1, 2006, and you are considering the purchase of an outstanding bond that was issued on January 1, 2004.
Which one of these statements must be true regarding this portfolio for the period?
After many observations the relative frequency = # of events of interest / total # events appears to settle down to a constant value.
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