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shutvik [7]
3 years ago
14

Assume that we are in the MM world. Health and Wealth Company is financed entirely by common stock that is priced to offer a 12

percent expected return. If the company repurchases 20 percent of the common stock and substitutes an equal value of debt yielding 8 percent, what is the expected return on the common stock after refinancing
Business
1 answer:
Levart [38]3 years ago
7 0

Answer:

13%

Explanation:

the new cost of equity = old cost of equity + [(debt / equity) x (old cost of equity - cost of debt)]

the new cost of equity = 12%+ [(20 / 80) x (12% - 8%)] = 12% + 1% = 13%

Since we are in the MM world, taxes do not exist, therefore they are not included in the equation.

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ConsGrough, Inc. has increased its annual common dividend by 3% in each of the years that the company has existed. If you believ
Salsk061 [2.6K]

Answer: $171.67 would be the price of the security

Explanation: This problem relates to dividend growth model, which can be shown as follows :-

=\frac{D_{1}}{P_{0}}+\:G

where'

d1 = expected dividend

p = price

g = growth rate

therefore,

=\frac{\$5\left ( 1+3\% \right )}{P_{0}}+\:3\%

solving this we get

p_0=\$171.67

8 0
3 years ago
Arjen owns investment A and 1 bond B. The total value of his holdings is 1,529 dollars. Investment A is expected to pay annual c
zloy xaker [14]

Answer:

In order to find the present value of the bond we have to calculate the present value of investment A and subtract is from 1529. We can find the present value of A by discounting all its cash flows.

As the first cash flow is received today and the last will be received 3 years form now there will be a total of 4 cash flows

1) 218.19 (Will not be discounted as we are receiving it today in the present)

2) 218.19/1.0987 (Discount by 1 year as cash will be received in 1 year)

3) 218.19/1.0987^2 (Discount by 2 years as cash will be received in 2 years)

4) 218.19/ 1.0987^3 (Discount by 3 years as cash will be received in 3 years)

= 218.19 + 198.58 + 180.74+ 164.51 = 762.02

PV of Bond = 1529-762.09= 766.91

Semi annual coupons mean 2 payments a year. Bond B matures in 23 years which means a total of 46 payments (23*2). N=46. A coupon rate of 6.4 percent means that the bond pays $64 (0.064*1000) each year. $64 divided by 2 is 32 which is the amount of each semi annual payment Arjen receives. Pv= 766.91 FV = 1000

In a financial calculator put

PV= -766.91

N= 46

FV=1000

PMT= 32

and compute I

I is 4.38 and we will multiply it by 2 because the payments are semi annual. So we will get an I of 8.76

YTM= 0.0876

Explanation:

5 0
3 years ago
You plan to invest in bonds that pay 6.0%, compounded annually. If you invest $10,000 today, how many years will it take for you
kati45 [8]

Answer:

The answer is 16 years.

Explanation:

The formula for calculating the value of an investment that is compounded annually is given by:

V(n)=(1+R)^nP

Where:

n is the number of years the investment is compounded,

R is the annual interest rate,

P is the principal investment.

We know the following:

25000=(1+0.06)^n \times 10000

And we want to clear the value <em>n</em> from the equation.

The problem can be resolved as follows.

<u>First step:</u> divide each member of the equation by 10,000:

\frac{ 25000}{10000}=(1+0.06)^n \times \frac{ 10000}{10000}

2.5=(1.06)^n

<u>Second step:</u> apply logarithms to both members of the equation:

log(2.5)=log (1.06)^n

<u>Third step:</u> apply the logarithmic property logA^n=n.logA in the second member of the equation:

log(2.5)=n.log (1.06)

Fourth step: divide both members of the equation by log1.06

\frac{log(2.50)}{log (1.06)} =n

n= 15.7252

We can round up the number and conclude that it will take 16 years for $10,000 invested today in bonds that pay 6% interest compounded annually, to grow to $25,000.

6 0
3 years ago
A fee is paid a. for each overdraft. c. monthly to have overdraft. b. for the first overdraft. d. annually to have overdraft.
larisa [96]
B. for the first overdraft
3 0
3 years ago
George offers to sell his car to Suzy for $10,000 on the coming Sunday, to which Suzy agrees. They write down the details on a p
max2010maxim [7]

Answer:

Promissory estoppel

Explanation:

Promissory estoppel means that in legal tenet that a promise or pledge can be enforced by law, actually if formulated without legal consideration, if the George now the (promisor) has made a pledge to a Susy the (promises) who then depends on that promise for a subsequent detriment. So what Promissory estoppel is expected to do is to stop the (George) promisor from insisting that an underlying promise should not be legally authorized or implemented. So Susy can sue George on the basis of promissory estoppel and get a reward for George's disappointment

8 0
3 years ago
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