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Answer:
WACC = 0.16637 OR 16.637%
Explanation:
WACC or weighted average cost of capital is the cost of a firm's capital structure which can comprise of debt, preferred stock and common equity. The WACC for a firm with only debt and common equity can be calculated as follows,
WACC = wD * rD * (1-tax rate) + wE * rE
Where,
- w represents the weight of each component based on market value in the capital structure
- r represents the cost of each component
- D and E represents debt and equity respectively
To calculate WACC, we first need to calculate the Market value an cost of equity.
The market value of equity = 30 million shares * $40 per share
MV of equity = $1200 million
The cost of equity can be found using the formula for Price today (P0) under constant growth model of DDM.
P0 = D1 / (r - g)
40 = 4 / (r - 0.07)
40 * (r - 0.07) = 4
40r - 2.8 = 4
40r = 4+2.8
r = 6.8 / 40
r = 0.17 or 17%
MV of debt = 40 million * 96.5% => $38.6 million
Total MV of capital structure = 38.6 + 1200 = 1238.6 million
WACC = 38.6/1238.6 * 0.08 * (1-0.33) + 1200/1238.6 * 0.17
WACC = 0.16637 OR 16.637%
Answer:
$50.67 per share
Explanation:
using the discounted cash flow model, we can determine Arras's total value:
CF₀ = $7.6
CF₁ = $7.98
CF₂ = $8.379
CF₃ = $8.79795
CF₄ = $9.2378475
CF₅ = $9.699739875
CF₆ = $9.893734673
we must first find the terminal value at year 5 = $9.893734673 / (7% - 2%) = $197.874694
now we can discount the future cash flows:
firm's value = $7.98/1.07 + $8.379/1.07² + $8.79795/1.07³ + $9.2378475/1.07⁴ + $9.699739875/1.07⁵ + $197.874694/1.07⁵ = $7.458 + $7.319 + $7.182 + $7.048 + $6.916 + $141.081 = $177.004 million
the shareholders' share of the firm's value = $177.004 million - $25 million = $152.004 million
price per share = $152.004 million / 3 million shares = $50.668 ≈ $50.67 per share
Answer:
Jackie owns the property until Maria dies
Explanation:
In this specific scenario, Jackie owns the property until Maria dies. That is because, in common law and statutory law, a life estate also known as life tenancy is defined as the ownership of land for the duration of a person's life. Therefore since Mike granted life estate to Maria and not Jackie, the land is legally Maria's to do as she wishes up until the moment of her death. Once this comes to pass the land ownership is returned to Mike.
Answer:
Detailed solution is given below in tabular form: