It is anticipated that Company XYZ will pay a dividend of $4.75 one year from now and a dividend of $5.0 one year following, after which dividends are expected to grow at the rate of 5% per annum indefinitely. If this information is communicated to the market, and the market’s required rate of return is 15%, estimate the current market price of the share.

(a) $20.0

(b) $27.2

(c) $30.0

(d) $47.6

 

 

Company has a P/E = 10.4. The company has a policy of retaining 40% of its earnings as reinvestments. This generates a growth rate for the company of 4%, which is expected to continue indefinitely. This is consistent with investors’ required rate of return in Cypress Avenue approximately equal to

(a) 10.0%

(b) 20%

(c) 30%

(d) 35%

 

 

We have the following two stocks AAA and BBB:

 

          Security Expected rate of return Beta

 

AAA 7.2% 1.1

BBB 7.4% 1.25

If the expected market rate of return is 6% and the risk-free rate is 2%, which security would be considered the better buy according to the CAPM?

a.        BBB because its beta is greater than that of AAA

b.        BBB because its expected return is much greater than the risk-free rate

c.        BBB because it offers a higher expected return than Jackson

d.        Both stocks are attractive in relation to the CAPM. 

 

 

 

A risk-free government security yields 5% and the expected market return is 11%.

The beta for company ABC is 0.8 and its growth rate is 4.8%. The company’s last dividend (recently paid) was $5.0. The current price of ABC should be:

(a.  $100.00;

(b)  $104.8;                  

(c)   $165.8;                

(d)   $204.8

 

 

Suppose that the firm’s unlevered cost of capital is 8%. The firm is capitalized 60% equity and 40% debt at market valuations with market interest rate on the debt = 5%.

Following Modigliani and Miller’s proposition II, the firm’s levered cost of equity is

(a)  8%

(b)  10%

(c)  16%

(d)  20%

 

 

Company XYZ has NO debt in its capital structure. There are no taxes. The firm considers that the firm’s cost of capital is 8%. The firm is considering a new capital structure with 40% debt. The market interest rate on the debt would be 5%. Following Modigliani and Miller’s proposition II, the firm’s cost of equity capital with the new capital structure would be:

(a)    8%

(b)   10%

(c)   13%

(d)    180% 

 

 

Company ABC has riskless debt in its capital structure, which makes up 30% of the total capital structure and equity is the other 70% of the total capital structure. The beta of the assets for this business is 0.7 (meaning that the unlevered beta (β_U) = 0.7). Assuming there are no taxes, and consistent with Modigliani and Miller’s proposition II, which of the following is closest to the value of the equity beta for ABC?

(a)  0.73

(b)  1.0

(c)  1.33

(d)  1.25.

 

 

 

Kindly provide explanation, formula needed and answers please