The estimated beta (/3) of a firm is 1.7. The market return (rm) is 14 %, and the risk-free rate (r1) is 7%. Estimate the cost of equity (ie).
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The estimated beta (/3) of a firm is 1.7. The market return (rm) is 14 %, and the risk-free rate (r1) is 7%. Estimate the
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- When evaluating a new project, the firm must consider all off the following factors EXCEPT: Sunk costs such as previous expenditures associated with a market test to determine the feasibility of the project. Changes in net operating working capital attributable to the project. The current after-tax salvage value of a piece of previously acquired land where the new project will be housed. The side effect that the project may have on the firm’s current business and operation.For each of the following factors, state if it will raise or lower the MARR: (a) Higher risk (b) Company wants to expand into a competitor’s area (c) Higher corporate taxes (d) Limited availability of capital (e) Increased market interest rates ( f ) Government imposition of price controlsHarris International currently pays a dividend of $3.24 per share on its preferred stock that sells for $54 per share. In order to raise capital to purchase a smaller competitor, the company plans to issue 2.7 million shares of preferred stock at a 10% discount to its current price. Determine (a) the amount of funding that Harris will realize through the stock offering, and (b) the cost of equity financing.
- A firm has current after-tax earnings of P1,000,000 and has declared a cash dividend of P20,000. The firm's dividend payout ratio is Format: 1%Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. It is considering the "weight loss" smoothies project. The project would require a $4 million investment outlay today The after-tax cash flows would depend on consumers’ demand. There is a 30% chance that demand will be good, and the project will produce after-tax cash flows of $2 million at the end of each year for the next 3 years. There is a 70% chance that demand will be poor, and the project will produce after-tax cash flows of $1 million at the end of each year for the next 3 years. The project is riskier than the firm's other projects, so it has a WACC of 12%. - The firm will know whether the project is success or not after receiving first year's cash flows from normal operating.. - After receiving the first year's cash flows (no matter what receive $1M or $2M in the first year), the firm will have the option to abandon the project. - If the firm decides to abandon the project, the company will no longer…The discount rate should be chosen when analyzing an investment project using Net Present Value criteria to be a. equal to the rate of return on the next best project. b. equal to the Federal Reserve’s current federal funds rate. c. equal to the market rate of new issue bonds. d. most likely to accepting the project.
- Omicron Technologies made a before-tax profit of $50 million this year. The firm has no debt and 10 million shares outstanding, with a current market price of $45 per share. Its unlevered cost of capital is 10%. Omicron's board is meeting to decide whether to pay out the entire $50 million as a dividend or to use it to repurchase shares of the firm's stock in the open market. If Omicron uses the entire $50 million to pay a dividend today, what is Omicron’s ex-dividend price of the shares in a perfect capital market with no taxes? Suppose that Omicron’s board decides to pay a dividend today. Now assume that Omicron pays corporate taxes of 30%. The marginal tax rate for shareholders is 35%. What is the after-tax dividend and effective tax rate for shareholders: Under a classical tax system? Under an imputation system (assuming that the dividend is 70% franked)? If Omicron instead chooses to use the entire $50 million to repurchase shares, what is the number of…A stock is currently at $20. It can go to $22 or $18 in 3 months. The risk free rate is 12% per year. A call option with a strike price of $21 is available. If the real world expected return on the stock is 16% per year, what is the implied real world discount rate for the option.The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment?
- The one-day return to investors who purchase IPO shares at the IPO offer priceare ____, and the returns to investors who purchase the shares a day after theIPO are generally ____ A. high; highB. high; lowC. low; highD. low; lowYatta Net International has manufacturing, distribution, retail, and consulting divisions. Projects undertaken by the manufacturing and distribution divisions tend to be low-risk projects, because these divisions are well established and have predictable demand. The company started its retail and consulting divisions within the last year, and it is unknown if these divisions will be profitable. The company knew that opening these new divisions would be risky, but its management believes the divisions have the potential to be extremely profitable under favorable market conditions. The company is currently using its WACC to evaluate new projects for all divisions. If Yatta Net International does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The firm will accept too many relatively safe projects. The firm will become less valuable. The firm will accept too many relatively risky…Which of the following statements about a project feasibility study is true? a. The feasibility study is based on available information and opinions of those involved in the preparation of such study. b. The feasibility study shows the actual results of operations of a business proposal. c. The feasibility study is not affected by any significant change in actual business conditions as compared to the assumptions used when the forecasts were d. A feasibility study is a plan for the conduct of business for a planning period and includes the budgeted income statement and all its supporting budgets.