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A firm is considering a project that will generate perpetual after-tax cash flows of $19,000 per year beginning next year. The project has the same risk as the firm’s overall operations and must be financed externally. Equity flotation costs 16 percent and debt issues cost 4 percent on an after-tax basis. The firm’s D/E ratio is 0.8. What is the most the firm can pay for the project and still earn its required return?
Lisa is interested in purchasing 1,000 shares of TJH, Inc. when the shares are issued. Her broker just gave Lisa a preliminary prospectus on these shares for her to review as she waits for the shares to be cleared for sale. What is the name of this p..
Fama’s Llamas has a weighted average cost of capital of 10.2 percent. The company’s cost of equity is 14 percent, and its cost of debt is 8.2 percent. The tax rate is 35 percent. What is Fama’s debt–equity ratio?
A convertible bond has a 6 percent coupon, paid semi-annually, and will mature in 18 years. If the bond were not convertible, it would be priced to yield 5 percent. The conversion ratio on the bond is 30 and the stock is currently selling for $39 per..
A trader buys two call options, one with strike $55 and price $10, the other with strike $65 and price $5. The trader also sells two call options, both with strike $60 and price $7. Ignore the time value of money and show trader's net profit as a fun..
Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.00 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?
A firm has $80 million in debt and 60% of its capital structure consists of common equity. The firm has no preferred stock. The firm’s bonds have YTM of 8.5%, and the firm is subject to a 30% corporate tax rate. The firm has common stock with a beta ..
Calculate the present value of the following annuity streams: $7,000 received each year for 5 years on the last day of each year if your investments pay 6 percent compounded annually.
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1000 and a coupon rate of 7.0% (annual payments). The following table summarizes the YTM for similar ten-year..
In addition to project selection, what other decisions can capital budget techniques help managers with?
Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
The Saunders Investment Bank has the following financing outstanding. Debt: 150,000 bonds with a coupon rate of 11 percent and a current price quote of 108; the bonds have 20 years to maturity. 320,000 zero coupon bonds with a price quote of 16 and 3..
An analyst has modeled the stock of a company using a Fama-French three-factor model. The risk-free rate is 4%, the market return is 11%, the return on the SMB portfolio (rSMB) is 2.2%, and the return on the HML portfolio (rHML) is 5.8%. If ai = 0, b..
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