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ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $600,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $300,000 and the interest rate on its debt is 4.5 percent. Both firms expect EBIT to be $67,000. Ignore taxes.
a. Richard owns $36,000 worth of XYZ’s stock. What rate of return is he expecting?
b. Suppose Richard invests in ABC Co. and uses homemade leverage to match his cash flow in part a. Calculate his total cash flow and rate of return.
c. What is the cost of equity for ABC and XYZ?
d. What is the WACC for ABC and XYZ?
What is the total present value of the following series of cash flows, discounted at 10 percent?
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You purchase a $100,00 life insurance policy for a single payment of $35,000. If you want to earn 9 percent on invested funds, how soon must you die for the policy to have been the superior alternative? If you die within ten years, what is the return..
If a firm that CANNOT issue new equity grows at a rate higher than SGR, which of the following MUST be true? They can absorb the risk by plowing back the Capital Surplus. Trick question: a firm cannot grow at a rate higher than SGR
Reminiscent of the __________ tradition, it is suggested that some animals have the cognitive capacity to possess a conscious life of their own, and people have a duty not to treat these animals as mere objects and means to their own ends.
Moonkist is a manufacturer orange juice concentrate products. The company is considering entering a new product market, the manufacture and sale of fresh-squeezed orange juice. The proposed project will last for four years, after which, the equipment..
Critique the benefits and drawbacks of corporation as a form of business organization.
You are considering an investment in Keller Corp's stock, which is expected to pay a dividend of $1.50 a share at the end of the year (D1 = $1.50) has a beta of 0.9. The risk-free rate is 4.6%, and the market risk premium is 5.0%. Keller currently se..
What is the current price for a General Motors 6% corporate bond with 10 years to maturity if the market rate of interest for similar bonds is 7%? What would the current price be if the market rate of interest drops to 4%?
A bank plans to reduce its holdings of liquid assets but at the same time it does not with to increase its liquidity risk. What and how can the bank do to achieve its wishes? Please list and clearly explain a little bit.
Three years ago, you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate of 8% paid annually, and a face value of $1,000. Each year you reinvested all coupon interest at the prevailing reinvestment rate shown in the tabl..
choose an organization as the focus for a project proposal. the organization can be an existing company nonprofit
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