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Backyard Utility is expected to have an EBIT of $250,000 and is an all-equity firm. EBIT is expected to grow at 5% per year. In order to get this growth rate, Backyard needs to retain 40% of earnings for investment. The remaining will be paid out as dividends. The firm's corporate tax rate is 20%. The discount rate for the firm is 10%.
(a) What is the market value of the firm?(b) Now assume the firm issues $1 million of debt paying interest of 4% per year, using the proceeds to retire equity. The debt is expected to be permanent. What is the equity value of the firm after refinancing?(c) What is the required return on equity after refinancing?(d) Assume the growth rate of net income is the same as 5% after refinancing. Backyard now only retains 23.81% of its earnings for investment. Compute the equity value by discounting all the future dividends as in (a). (Hint: you should get the same result as in (b))(e) If Backyard's manager only wants its total equity value to be $1.8 million instead, how much debt should Backyard actually use?
You find a certain stock that had returns of 16 percent, -9%, 23%, and 24% for four of the last five years. The average return of the stock over this period was 14.40 percent.
The current market price of the firm's shares is $20. If the firm declares a 10 percent stock dividend followed by a cash dividend of $0.10 per share,
On August 1, 2006, Zambabwe changed the value of the Zim dollar from Z$101/U.S.$ to Z$250/U.S.$
The expected return on HiLo stock is 14.50 percent while the expected return on the market is 11.0 percent. The beta of HiLo is 1.5. What is the risk-free rate of return.
Old Alfred Road, who is well-known to drivers on the Maine Turnpike, has reached his seventieth birthday and is ready to retire. Mr. Road has no formal training in finance but has saved his money and invested carefully.
Which one of the following ratios indicates the average number of days that sales are outstanding?
By what percentage did the cross exchange rate of the Polish zloty in Swedish kronor (that is, the number of kronor that can be purchased with one zloty) change over the past year?
Suppose your required return on the project is 9 percent and your pretax cost savings are $193,000 per year. What is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV $ Requi..
What was GDP in 2008 for Illinois? How does Illinois rate when compared to other states?
Before one year, Mr. Seth Cohen invested $10,400 in 200 shares of 1st Industries, Inc. stock and just received a dividend of $600.00.
The firm has decided to spend all of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?
This dividen is expected to grow at a rate of 14% for three years and then 6% every year after that forever. The required return on penn' stock is 16%. Caluclate the price of Penn's stock today.
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