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In each of the theories of capital structure, the cost of equity increases as the amount of debt increases. So why don't financial managers use as little debt as possible to keep the cost of equity down? After all, aren't financial managers supposed to maximize the value of a firm?
The capital budgeting director of Spar Corporation is evaluating a project which costs $280,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $42,500 per year. As soon as the project ends, we will sell..
The Granite Paving Company is all-equity financed and has the following free cash flows in years 1-4: $3 million ($3M); $3.7M; $4M; $4.2M. After year 4, the firm is expected to grow at a sustainable rate of 3% per annum. With a WACC of 12%, what is t..
Given that a company does not yet pay dividends, what will be the immediate effect on earnings per share (EPS) by issuing common stock to finance long-term expansion of the business?
To finance the purchase, GBH will sell 20-year bonds with a $1000 par value paying 7.9 percent per year (paid semi annually) at the market price of $928. Preferred stock paying a $2.55 dividend can be sold for $34.76. Common stock for GBH is currentl..
A widget manufacturer currently produces 200,000 units per year. It buys widget lids from an outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper to make these lids rather than buy them. The plant manager estim..
Compare and contrast three potential financial outcomes your Learning Team envisions for the initiative. Evaluate your findings to determine the most likely outcome. Include calculations that support your analysis of various financial outcomes and di..
Marcia Almeida works as a sales analyst for a toy manufacturer. She predicts that toy sales will decrease by 20% from May to June. If the amount of the sales decrease is $605,400, what level of sales is she predicting for June? Because of Father's Da..
Assume that your company negotiated a deal where it would pay $12,000 for the investment and receive a payment of $24,000 at the end of 7 years. What is the IRR on this investment? Should the company make the investment?
The Imaginary Products Co. currently has debt with a market value of $275 million outstanding. The debt consists of 9 percent coupon bonds (semi annual coupon payments) which have a maturity of 15 years and are currently priced at $1,054.14 per bond...
A pension plan is obligated to make disbursements of $1 million, $2 million, $5 million and $1 million at the end of each of the next four years, respectively. Find the duration of the plan’s obligations if interest rates are flat at 10% annually
The eastern shuttle, INC is a regional airline providing shuttle service between New York and Washington DC. An analysis of the monthly demand for service has revealed the following demand relation:
The stock’s current dividend is $1.00, and dividends are expected to grow at a constant rate of 3.5% per year. The intrinsic value of a stock should equal the sum of the present value of all of the dividends that a stock is supposed to pay in the fut..
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