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1. Fama’s Llamas has a weighted average cost of capital of 10 percent. The company’s cost of equity is 14 percent, and its pretax cost of debt is 8 percent. The tax rate is 38 percent. What is the company’s target debt−equity ratio?
2. Suppose Stark Ltd. just issued a dividend of $1.85 per share on its common stock. The company paid dividends of $1.50, $1.59, $1.66, and $1.77 per share in the last four years. If the stock currently sells for $45, what is your best estimate of the company’s cost of equity capital using the arithmetic average growth rate in dividends? What if you use the geometric average growth rate?
You plan to buy a house in 8 years. You want to save money for a down payment on the new house. You are able to place $183 every month at the end of the month into a savings account at an annual rate of 9.39 percent, compounded monthly. How much mone..
The Clayton Manufacturing Company is considering an investment in a new automated inventory system for its warehouse that will provide cash savings to the firm over the next five years. The firm’s CFO anticipates additional earnings before interest, ..
Which of the following observations concerning trust departments is true?
A bond with a 7% coupon rate makes payments on January 15 and July 15 of each year (181-day coupon period). On January 30 (15 days have passed since the last semiannual coupon was paid), the ask price for the bond was reported as 100.0625. If you pur..
Why do banks and other financial institutions willingly comply with financial regulation, even though they often complain about it?
The expected return for the general market is 13.0% and the risk premium in the market is 8.9%. Tasaco, LMB, and Exxos have betas of 0.849, 0.681, and 0.581 respectively. What are the appropriate expected rates of return for the three securities?
What is the present value of a lease on a warehouse, where the tenants have a lease that goes into perpetuity ad have agreed to pay $300 at the end of each month of the lease with an annual discount rate of 8 percent?
In general, the cost of debt capital is lower than the cost of equity capital. For this reason, it might be expected that firms with high debt ratios would have a lower weighted average cost of capital. Explain at least one reason why this is not the..
FCF1 = $7 million; FCF2 = $45 million; FCF3 = $55 million. Assume that free cash flow grows at a rate of 4% for year 4 and beyond. If the weighted average cost of capital is 10%, calculate the value of the firm.
Do the bank lending channel and the balance sheet channel reinforce or partially negate the effect of the change in the real interest rate? Explain.
You are the administrator of a major regional not-for profit hospital. At the latest board meeting, certain members of the board noted that an increasing amount of the competitor hospitals are pursuing "other sources of revenue". Please explain and o..
Carborundum Metals issues commercial paper with a face value of $1,000,000 and a maturity of three months. Carborundum receives net proceeds of $992,000 when it sells the paper. If the prime rate is 8% APR compounded quarterly, how much savings in in..
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