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The ABC Company currently has $16,000,000 in physical assets that have always generated a steady stream of earnings for the company. The management of the firm has always paid all of its earnings to shareholders as a dividend. While there is risk in the return on assets, the average return over many years has been steady at 10 percent. The firm has 1,000,000 shares outstanding. The current ex-dividend price of a share of equity is $15.00.
a. What is the required rate of return for this firm implied by the current market price?
The management wants the company to grow. Rather than pay out all of the firm's earnings as a dividend this year (t = 0), the management wants to plow back 60 percent of the earnings into the business.
b. Assuming that the management will be able to maintain the return on assets it has achieved in the past as the firm grows, what will be the ex-dividend stock price under the new growth policy?
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Mr. Henry can invest in Highbull stock and Slowbear stock. His projection of the returns on these two stocks is as follows:
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Andre has asked you to estimate his business, Andre's Hair Styling. Andre has 5-barbers working for him. Each barber is paid $9.90 per hour and works a 40-hour week and a fifty week year, regardless of number of haircuts.
Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm's FCF for the year?
Barneycle's Boat Shop sells 3000 of its glow in the dark boats each year and has fixed order costs of 120 each order. Carrying cost per boat is $150 per year. Determine the optimal order quantity for these boats?
John purchase a home for $150,000 and takes out a five year adjustable rate mortgage with a beginning rate of 6%. He makes annual payments rather than monthly payments.
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