A stock pays semi-annual dividends. It just paid a dividend of $10. The growth rate in the dividend is 1% every 6 months, given as an effective 6 month rate. You estimate that the stock's required return is 21% pa, as an effective annual rate.
Using the dividend discount model, what will be the share price?
A mining firm has just discovered a new mine. So far the news has been kept a secret.
The net present value of digging the mine and selling the minerals is $250 million, but $500 million of new equity and $300 million of new bonds will need to be issued to fund the project and buy the necessary plant and equipment.
The firm will release the news of the discovery and equity and bond raising to shareholders simultaneously in the same announcement. The shares and bonds will be issued shortly after.
Once the announcement is made and the new shares and bonds are issued, what is the expected increase in the value of the firm's assets ##(\Delta V)##, market capitalisation of debt ##(\Delta D)## and market cap of equity ##(\Delta E)##? Assume that markets are semi-strong form efficient.
The triangle symbol ##\Delta## is the Greek letter capital delta which means change or increase in mathematics.
Ignore the benefit of interest tax shields from having more debt.
Remember: ##\Delta V = \Delta D+ \Delta E##
A man has taken a day off from his casual painting job to relax.
It's the end of the day and he's thinking about the hours that he could have spent working (in the past) which are now:
Question 574 inflation, real and nominal returns and cash flows, NPV
What is the present value of a nominal payment of $100 in 5 years? The real discount rate is 10% pa and the inflation rate is 3% pa.
Which of the following statements about futures and forward contracts is NOT correct?
Question 772 interest tax shield, capital structure, leverage
A firm issues debt and uses the funds to buy back equity. Assume that there are no costs of financial distress or transactions costs. Which of the following statements about interest tax shields is NOT correct?
Question 780 mispriced asset, NPV, DDM, market efficiency, no explanation
A company advertises an investment costing $1,000 which they say is under priced. They say that it has an expected total return of 15% pa, but a required return of only 10% pa. Of the 15% pa total expected return, the dividend yield is expected to be 4% pa and the capital yield 11% pa. Assume that the company's statements are correct.
What is the NPV of buying the investment if the 15% total return lasts for the next 100 years (t=0 to 100), then reverts to 10% after that time? Also, what is the NPV of the investment if the 15% return lasts forever?
In both cases, assume that the required return of 10% remains constant, the dividends can only be re-invested at 10% pa and all returns are given as effective annual rates. The answer choices below are given in the same order (15% for 100 years, and 15% forever):
Question 983 corporate financial decision theory, DuPont formula, accounting ratio
A company manager is thinking about the firm's book assets-to-equity ratio, also called the 'equity multiplier' in the DuPont formula:
###\text{Equity multiplier} = \dfrac{\text{Total Assets}}{\text{Owners' Equity}}###What's the name of the decision that the manager is thinking about? In other words, the assets-to-equity ratio is the main subject of what decision?
Note: DuPont formula for analysing book return on equity:
###\begin{aligned} \text{ROE} &= \dfrac{\text{Net Profit}}{\text{Sales}} \times \dfrac{\text{Sales}}{\text{Total Assets}} \times \dfrac{\text{Total Assets}}{\text{Owners' Equity}} \\ &= \text{Net profit margin} \times \text{Total asset turnover} \times \text{Equity multiplier} \\ \end{aligned}###