Thư viện tài liệu, ebook tham khảo dành cho học sinh, sinh viên

P0 is maximized ($26.89) at D/A = $500,000/$2,000,000 = 25%, so optimal D/A = 25%. EPS is maximized at 50%, but primary interest is stock price, not E(EPS). The example shows that we can push up E(EPS) by using more debt, but the risk resulting from increased leverage more than offsets the benefit of higher E(EPS).

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The company does not have the option to delay the project. The company may abandon the project after a year, if the customer has not adopted the product. If the project is abandoned, there will be no operating costs incurred nor cash inflows received after the first year.

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The higher the duration, the higher the level of interest rate risk If interest rates are expected to rise, a bond portfolio manager may choose to bear some interest rate risk (duration shifting)

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1 2 3 4 Revenues 210 220 232 243 Op. Costs (60%) -126 -132 -139 -146 - Deprn Expense -79 -108 -36 -17 - Oper. Income (BT) 5 -20 57 80 - Tax (40%) 2 -8 23 32 Oper. Income (AT) 3 -12 34 48 + Deprn Expense 79 108 36 17 Operating CF 82 96 70 65

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Treasury bill futures contracts call for the delivery of $1 million par value of 91-day T-bills on the delivery date of the futures contract On the day the Treasury bills are delivered, they mature in 91 days

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Find cash flow differences between the projects for each year. Enter these differences in CFLO register, then press IRR. Crossover rate = 8.68%, rounded to 8.7%. Can subtract S from L or vice versa, but better to have first CF negative. If profiles don’t cross, one project dominates the other.

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The risk premium is the component of interest rates that is most difficult to measure Risk-averse investors expect to be compensated for risks they take The price of a risky security must reflect a risk premium to entice someone to buy it The magnitude of the risk premium depends on how much risk the security carries The higher the risk premium...

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The S&P 500 index is capitalization-weighted Each of the 500 share prices in the index is multiplied by the number of outstanding shares in that particular firm Standard and Poor’s calculates the index by adding these figures and dividing by the index divisor

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Corporations own most preferred stock, because 70% of preferred dividends are nontaxable to corporations. Therefore, preferred stock often has a lower B-T yield than the B-T yield on debt. The A-T yield to an investor, and the A-T cost to the issuer, are higher on preferred stock than on debt. Consistent with higher risk of preferred stock.

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Capital gains yield = g = -6.00% Dividend yield = 13.00% - (-6.00%) = 19.00% Since the stock is experiencing constant growth, dividend yield and capital gains yield are constant. Dividend yield is sufficiently large (19%) to offset a negative capital gains.

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