Reference no: EM131893300
1. Viacon’s stock is selling for $15 per share. The firm’s income, assets, and stock price have been growing at an annual 15 percent rate and are expected to continue to grow at this rate for 3 more years. No dividends have been declared yet, but the firm intends to declare a dividend of D3 = $2.00 at the end of the last year of its supernormal growth. After that, dividends are expected to grow at the firm’s normal growth rate of 6 percent. The firm’s required rate of return is 18 percent. The stock is
Undervalued by $3.03.
Overvalued by $3.03.
Overvalued by $2.42.
Overvalued by $2.25.
Undervalued by $2.25
2. Amile Corporation has a total of $1,000,000 in current assets. 15% of current assets are permanent current assets. The company has $700,000 in fixed assets. The current short-term rate is 6.5% while the current long-term rate is 9%. The company has a tax rate of 30%.
The company is deciding between two financing plans. The conservative plan calls for 40% of temporary current assets to be financed by short-term sources with the remainder of assets financed by long-term sources. The more aggressive plan calls for all temporary current assets and permanent current assets to be financed by short-term sources and all fixed assets to be financed by long-term sources.
If Amile Corporation's EBIT is $525,000, calculate net income under each alternative. Then determine which of the following answer choices is true.
a. Total interest expense is greater under the more aggressive plan.
b. Net income under the conservative plan is $245,000 and $239,000 under the more aggressive plan.
c. Short-term interest expense is higher under the more conservative plan.
d. Net income under the conservative plan is $379,000 and $385,000 under the more aggressive plan.
e. Net income under the conservative plan is $266,350 and $277,900 under the more aggressive plan.
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