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Problem 3 (MM fallacies: Leverage and share prices)
Assume that Rose Corporation's (RC) EBIT is not expected to grow in the future and that all earnings are paid out as dividends. RC is currently an all--equity firm. It expects to generate earnings before interest and taxes (EBIT) of $6 million over the next year. Currently, RC has 5 million shares outstanding and its stock is trading for a price of $12 per share. RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.
(c) Following the borrowing of $12million and subsequent share repurchase, the number of shares that RC will have outstanding is closest to:
(1) 4.0 million (2) 6.0 million (3) 4.9 million (4) 4.5 million
Susan Young is an attorney for a small law company in Arizona. She is also a part-time inventor and an avid golfer. One day Susan's golf foursome included a man named Henry Jones, a manufacturer of Christmas jewelry.
1. consider a small opened economy where the trade sector plays an important role for the economic growth of the
Kish's beta coefficient can be discovered as a weighted average of its stocks betas. The risk free rate is 6 percent, and you believe the following probability distribution future market returns is realistic:
What type of project analysis involves altering particular combinations of (multiple) assumptions? A.) Sensitivity Analysis B.) Scenario Analysis C.) Break even analysis D.) Real Option Analysis
Staind, Inc., has 7 percent coupon bonds on the market that have 13 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 10 percent, what is the current bond price?
High Mountain Foods has an equity multiplier of 1.55, an asset utilization rate of 1.1', and a profit margin of 7.5%. What is the return on equity?
The risk free rate is 5.1 percent, investment's beta is 1.4, equity market risk premium is 5.0 percent and the cost of debt is 4.5%?
What is a project finance (PF) loan? What role does a stand-alone company play in the typical project finance deal?
Suppose the CFO wants yo uto do a scenario analysis with diffeent values for the cost savings, the machine's salvage value, and the net operatin gworking capital (NOWC_ requriement. She asks you to use the following probabilities and values in the..
Describe Conversion of convertible bonds into stock with various stock prices and what is the impact of conversion on the stock price
The required return is 2.5 percent per period. Current Policy New Policy Price per unit $ 104 $ 108 Cost per unit $ 47 $ 47 Unit sales per month 3,240 3,295 Calculate the NPV of the decision to change credit policies.
what will be the total expected dollar capital gain per share on the stock three years from today? Assume dividends are paid annually.
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