FIN515 Week 4 Homework 9-1 Future Value of a Company Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price? Answer: Find price of stock in 1 year. Current Price = $50, Dividend = $2, Cost of Equity Capital = 15% X = Price the stock will sell right after paying the dividend: 50 = (2+ X) /(1+0.15) X = 55.50 Therefore, price the stock will sell right after paying the one year dividend is $55.5 9-4 Dividend Yield and Cost of Equity Capital Krell Industries has a share price of $22 today. If Krell is expected to pay a dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s dividend yield and equity cost of capital?
• having liability exposure similar to that of a sole proprietor. • being taxed like a corporation. • being taxed like a corporation with liability like a partnership. 4. Which one of the following is least apt to help convince managers to work in the best interest of the stockholders?pay raises based on length of service • implementation of a stock option plan • threat of a proxy fight • management compensation tied to the market value of the firm’s stock • threat of a takeover of the firm by unsatisfied stockholders 5. a. Compute the future value of $2,000 compounded annually for 20 years at 4 percent.
7. Suppose Max's Shuttle Service wants to earn a profit before taxes of $375,000 in the coming year. Max's selling price is $40, its variable cost per unit is $20, and its fixed costs are $150,000. How many tickets must the company sell? a.
Second, This was an all-cash buyout of $52 Billion. This would mean that the loan that was taken out by InBev needs to be repaid before a certain date. Most good businesses treat loan re-payment as one of the most important priorities. This is why Anheuser-Busch InBev paid the loan back before the expected date of repayment. Anheuser-Busch InBev would be making an annual revenue of $36 Billion, which still would leave the company with a little over 2 years for the break even point.
Problem 18-4 Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.5 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.5%, a debt cost of capital of 7%, a marginal corporate tax rate of 35%, and a debt-equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? We can compute the levered value of the plant using the WACC method.
Saheed Olagunju Homework Wk2 FI515 Chapter 3-1 Days Sales Outstanding Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year. Answer AR= 20x20000=400,000 3-2 Debt Ratio Vigo Vacations has an equity multiplier of 2.5.
During 2007 and 2008, Browser reported net income of $90,000 and $50,000 and paid dividends of $40,000 and $60,000, respectively. Fire wire reported a balance in its investment account of $230,000 on December 31, 2008. It uses the equity method in accounting for this investment. g. What is the annual amount of amortization of differential over the ten year period? h. In 2007, will Fire Wire report and increase or a decrease in the investment account balance?
They were given a 10% discount by the manufacturer. They paid $400 for shipping and sales tax of $3,000. Stine estimates that the machinery will have a useful life of 10 years and a residual value of $20,000. If Stine uses straight-line depreciation, annual depreciation will be • $3,760. • $4,072.
Saheed Olagunju Homework Wk2 FI515 Chapter 3-1 Days Sales Outstanding Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year. Answer AR= 20x20000=400,000 3-2 Debt Ratio Vigo Vacations has an equity multiplier of 2.5.
An investor purchased call options for $2 per option. This investor purchased 1,000 of these call options on a stock that has a standard deviation of 20% and an exercise price of $140/share. The investor has a liquidity problem at this point and needs to sell the call options at current value. The current stock price is $120/share and the option will expire in a ½ year. What is the total profit or loss to the investor?