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- What does it mean when a company has zero net income but its stock price has increased? How do you recognize the change under the equity method?Is this statement true or false? Give a reason for your answer. "The bird-in-hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio."Is this statement true or false? Give a reason for your answer. "An increase in a firm's inclination to pay dividends may be because of a decline in profitable investment opportunities in the future."
- The bird-in-hand theory would predict that the companies could decrease their cost of equity financing by raising their dividend payout. True or false?1. . Assuming that shareholders expect no growth from their investment, what would the cost of equity be? 2. If retained earnings were used instead of new issuances, what would the cost of the new financing be?a. What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? b. Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. c. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?
- Which of the following statements is correct? A. If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm’s AFN to be negative. B. AFN is not always positive. C. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm’s actual AFN must, mathematically, exceed the previously calculated AFN. D. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio. E. Dividend policy does not affect the requirement for external funds based on the AFN equation.What make ROE(return on equity) of a company decrease further into negatives even though their financial leverage starts to rises? If a company multiplier for financial leverage starts to rise, what does it implies? Why?A business can be valued by capitalizing its earnings stream. Does one measure make more sense than the others? What factors would make a stock worth more or less than your calculated value?
- Which one of the followings is incorrect regarding to cost of equity: On average, it is higher than cost of debt. It moves in the same direction with tax rates. It is affected by return on market portfolio. For a dividend paying company, it is sensitive to growth expectations for future dividends. It is highly dependent on risk level of the firm and growth rate. For calculating cost of equity, we can rely on dividend growth model or SML approach. Both models might suffer from the assumption that past is a good predictor of future. True False Percy's Wholesale Supply has earnings before interest and taxes of €106,000. Both the book and the market value of debt is €170,000. The unlevered cost of equity is 15.5 per cent while the pre-tax cost of debt is 8.6 per cent. The tax rate is 28 per cent. What is the firm's weighted average cost of capital? Show your steps.How a firm splits its income between retained earnings and dividends does not affects its rate of growth, which is determine by the firms basic earning power. True or false ?Indicate whether the following statements are true or false. If the statementis false, explain why.f. If a firm follows a residual dividend policy then, holding all else constant, its dividend payout will tend to rise whenever the firm’s investment opportunities improve.