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If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.
a. The division’s basic earning power ratio is above the average of other firms in its industry.
b. The division’s total assets turnover ratio is below the average for other firms in its industry.
c. The division’s total debt to total capital ratio is above the average for other firms in the industry.
d. The division’s inventory turnover is 6×, whereas the average for its competitors is 8×.
e. The division’s DSO (days’ sales outstanding) is 40 days, whereas the average for its competitors is 30 days.
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Common stock financing is often considered the safest form of financing, as the issuing firm is under no obligation to pay dividends. Owners of common shares assume this uncertainty in the hope of favourable returns. What is the argument for issuing ..
Calculate the after-tax cost of debt under each of the following conditions: Interest rate of 13%; tax rate of 0%. Round your answer to two decimal places. Interest rate of 13%; tax rate of 15%. Round your answer to two decimal places.
If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
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Suppose the 3 month U.S. interest rate is 3% ((0.03), the 3 month UK interest rate is 2% (0.02), the current spot rate is $2 = £1, and the 3 month forward rate is $2.04 = £1. Would an investor in USA choose to invest in the US or the UK?
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Use the binomial option pricing model to find the value of a call option on £10,000 with a strike price of €15,000. The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/£. Th..
All the following statements concerning “net gifts” are correct EXCEPT:
A bond with face and redemption amount of $3000 with annual coupons is selling at an effective annual yield rate equal to twice the coupon rate. The present value of the coupons is equal to the present value of the redemption amount. What is the sell..
XYZ Inc has a capital structure that consists of 40% debt and 60% common stock. Dividends are growing at a constant rate of 5% and the current dividend is $2.00. The stock is currently selling for $21.88. The before tax cost of debt is 14% and the fi..
Your company is considering a new project that will require $825,000 of new equipment at the start of the project. The equipment will have a depreciable life of 9 years and will be depreciated to a book value of $141,000 using straight-line depreciat..
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