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Union Brick Inc. (UBI) has a total market value of $200 million, consisting of 2 million shares of common stock selling for $50 per share and $100 million of 10 percent perpetual bonds currently selling at par. UBI pays out all earnings as dividends, and its marginal tax rate is 40 percent. The firm’s earnings before interest and taxes (EBIT) are $30 million. Management is considering increasing UBI's debt until its capital structure has 60 percent debt, based on market values. The additional funds will be used to repurchase stock at the new equilibrium price. At the new capital structure, UBI's cost of debt is estimated at 13.182 percent and its cost of equity is estimated to be 10 percent.
What is UBI's weighted average cost of capital (in percentages, i.e., 9% instead of 0.09) at its new capital structure?
A bond sold five weeks ago for $1,100. The bond is worth $1,050 in today’s market. Assuming no change in risk, which is greater than the other among the following three variables: (i) yield to maturity; (ii) current yield; and (iii) capital gains yie..
Tre-Bien, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected.
nvestors require a 15% rate of return on Levine Company's stock (that is, rs = 15%). What is its value if the previous dividend was D0 = $2.25 and investors expect dividends to grow at a constant annual rate of (1) -3%, (2) 0%, (3) 3%, or (4) 13%? Ro..
Dye Trucking raised $280 million in new debt and used this to buy back stock. After the recap, Dye's stock price is $7.75. If Dye had 45 million shares of stock before the recap, how many shares does it have after the recap?
An investor purchases 300 shares of ABC stock for $15.00 a share and immediately sells 2 covered call contracts at a strike price of $20.00 a share. The premium is $2.00 a share. What is the maximum profit and the maximum loss?
Pierre Dupont just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Venice Corp. that pays an annual coupon of 5.5 percent. If the current market rate is 7.25 percent, what is the maximum amount Pierre shoul..
Consider an adjustable rate mortgage of $90,000 with a maturity of 30 years and monthly payments. At the end of each year, the interest rate is adjusted to become two percentage points above the index. There is an annual cap of 300 basis points (3%),..
Huron Manufacturing plans to pay a dividend of $5 per share. The growth rate is 7 percent and the discount rate is 12 percent. What is the present value of growth opportunities (PVGO)?
Suppose the exchange rate is $1.547 per euro. If the dollar depreciates by 11% against the dollar, how many Euros would a dollar buy tomorrow?
Should a project or an ongoing business use debt or equity financing? What are the pros and cons of each? If a project uses both equity and debt finance, what is the appropriate mix? What types of financing are used by your current organization (or a..
Security I has a beta of 1.3, the risk-free rate is 4%, and the expected return on the market is 11%. What is the expected return for Security I?
When interest is compounded continuously, the amount of money increases at a rate proportional to the amount S present at time t, that is, dS/dt = rS, where r is the annual rate of interest.
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