If the required rate of return on the stock is 20%, what is the current value of the stock today? A) $30 B) $50 C) $100 D) $54 E) None of the above Answer: B Response: P = (6/(0.2-0.08) = 50 5. WorldTour Co. has just now paid a dividend of $6 per share (Do), the dividends are expected to grow at a constant rate of 5% per year forever. If the required rate of return on the stock is 15%, what is the current value on stock (after paying the dividend)? A) $63 B) $56 C) $40 D) $48 E) None of the above Answer: A Response: P = (6*1.05)/(0.15 0.05) = 63 6.
Corporation FinanceBus 35200Case Study: Penelope | | 1. What is the NPV of the first generation phone project, ignoring both the possibility of investing in the second-generation project and the possibility of selling the equipment after two years? We calculate the NPV by adding the yearly future free cash flows of the project discounted at a rate equal to the cost of equity. We use the CAPM formula to calculate the cost of equity, assuming a risk free rate of 10%, a β of 1.2 and the market risk premium of 8%. We got a cost of equity of 20%.
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?
Answer AR= 20x20000=400,000 3-2 Debt Ratio Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio? Answer Equity multiplier Asset /equity = 2.5/1 A=L+E 2.5=1.5=+1 Debt/asset = 1.5/2.5 = .6 3-3 Market/Book Ratio Winston Washers’s stock price is $75 per share. Winston has $10 billion in total as- sets.
A tax advantage of business combination can occur when the existing owner of a company sells out and receives: a. cash to defer the taxable gain as a “tax-free reorganization” b. stock to defer the taxable gain as a “tax-free reorganization” c. cash to create a taxable gain d. stock to create a taxable gain 2. Publics Company acquired the net assets of Citizen Company during 20X9. The purchase price was $800,000. On the date of the transaction, Citizen had no long-term investments in marketable equity securities and $400,000 in liabilities. The fair value of Citizen assets on the acquisition date was as follows: |Current assets |$ 800,000 | |Noncurrent assets | 600,000 | | |$1,400,000 | How should Publics account for the $200,000 difference between the fair value of the net assets acquired, $1,000,000, and the cost, $800,000?
• 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.
Berry‟s Bug Blasters had a 25.52% Return on assets. This means they were able to receive $25.52 profit on every $100 in assets. Return on Common Stockholders‟ Equity: Determines corporate profitability. Investors can measure how Berry‟s is using the money they invested. To calculate ROE divide Net Profit after Taxes by Stockholder‟s Equity.
Answer AR= 20x20000=400,000 3-2 Debt Ratio Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio? Answer Equity multiplier Asset /equity = 2.5/1 A=L+E 2.5=1.5=+1 Debt/asset = 1.5/2.5 = .6 3-3 Market/Book Ratio Winston Washers’s stock price is $75 per share. Winston has $10 billion in total as- sets.
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? Answer: Dividend Yield = Dividend / Share price = 0.88/22 = 4% Capital Gain Rate = (End of year stock price – Share price today) / Share price today = (23.54 – 22) / 22 = 7% Total expected return (Equity cost of capital) = 4% + 7% = 11% 9-5 No Growth Company NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year? Answer: Assume: dividends are paid at the end of the year Stock pays a total of $2.00 in dividends per year. Valuing this dividend as a perpetuity: P = $2.00 / 0.15 = $13.33 9-6 Value of Operations of Constant Growth Summit Systems will pay a dividend of $1.50 this year.
$20,000*20 days outstanding= AR $400,000 3-2 Debt Ratio Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio? Equity Multiplier= 2.5 Asset/Equity = 2.5/1 1+1.5= 2.5 Debt/Asset= 1.5/2.5= .6 3-3 Market/Book Ratio Winston Washer’s stock price is $75 per share. Winston has $10 billion in total assets.