474 F

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Based on the info from the previous question Mom also asks us to calculate the cost of equity capital for the Fun Corp using the Dividend Growth Model approach. Which of the following is our answer?

%?

Mom tells us that the stock of the Fun Corp has a beta of .80. The market risk premium is 9 percent, and the risk free rate is 6 percent. Today, Fun Corp paid a dividend of $1.00 per share, and the dividend is expected to grow at 8 percent indefinitely. The stock currently sells for $18. She asks us to calculate the cost of equity capital for the Fun Corp using the Security Market Line approach. As a reminder, the Capital Asset Pricing Model is the equation of the SML showing the relationship between expected return and beta.

%?

Bob awakens from a short nap and tells us that he read in the Wall Street Journal that the appropriate cost of capital.

-Depends primarily on the use of the funds, not the source.

Father time asks us what is the expected return on asset A if it has a beta of .75, the expected market return is 12% and the risk-free rate is 4%?

.04 + (.12 - .04) x .75 .04 + (.08 x .75) .04 + .06 = .1 = 10%

Dory tells Nemo that Asset A has an expected return of 10% and a beta of 2.00. The risk free rate is 2%. She asks Nemo to calculate the market risk premium.

.10 = .02 + (x-.02) x 2.00

Mr. bob asks us to use newly purchased financial calculators to determine the present value of 1,000 to be received in 3 years at 15%.

3 N 15 I/YR 1,000 FV PV? $657.50

It is important that any rates being compared be first converted to effective rates. What is the effective annual rate of your home loan if the annual % rate is 6% compounded monthly?

6 I/YR Orange PV 6.17%

The 10 year bonds were issued two years ago at a coupon rate at 7 percent. If these bonds currently sell for 110% of par value, Mr. bob asks you to calculate the current yield to maturity?

7% x 1,000 110% x 1,000 10-2=8 8 N 70 PMT 1,100 PV 1,000 FV I/YR? 5.4%

The initial proposal from the Grinch indicates that direct costs of missing new securities are 5%. He states that CB enterprises needs to net $95 million for its project development team. ____ is the amount that must be raised by Grinch.

95,000,000 / 1-.05 95,000,000 / .95 95,000,000 / 5,000,000 = 5 million

Tinker and Pan are considering becoming a franchisee of the Hogwarts Hotel Corp. You state that franchising is a form of ___, ___, and ____ all in one. However, you are concerned that a proposed 150-room Hogwarts Hotel may bot be able to capture its fair share in an area that already has a 200-room Twilight Hotel, a 450-room Pixar Hotel, and a 200-room Star Wars Hotel. A comic-con convention is expected to occupy 900 rooms in the competitive market area. Tinker and Pan ask you how many rooms would be occupied at the Hogwarts Hotel if captures its fair shares of the Comic Con Convention rooms?

?

Uncle and Tim ask the team of advisors if they would like to use some of the funds of Creative Enterprises to invest in a hotel. This led to a discussion of the Valuation of Hospitality Real Estate. Of the three approaches to valuation which one was mentioned as the best approach in today's marketplace?

?

To see if we have been paying attention, Mom asks us which of the following the statements is true.

A and C True -a. Primary advantage of using the dividend growth model approach to estimating the cost of equity is its simplicity. A disadvantage of using the dividend growth model approach is that it does not explicitly consider risk. -c. The SML approach to estimating the cost of equity has 2 advantages: it explicitly adjusts for risk and it is applicable to companies other than those with steady dividend growth.

Duffy suggests that the Creative Enterprise might also consider a management contract with the Hogwarts Hotel Corp. Tinker and Pan ask why a hotel company would consider managing a hotel owned by someone else. Bob describes the advantages of management contracts to lodging companies. Which of the following best describes the advantages of management contracts to lodging management companies?

ALL ABOVE

Kim reminds us that a firm is said to be in ____ when its total book liabilities exceed the book value of the assets.

Accounting insolvency

Father time asks Dory if we can return to our discussion of risk and return. _______ is the amount of systematic risk present in a particular risky asset relative to that in an average risky asset. He also reminds us that if the ____ is less than 1.0, it means that the investor in this particular risky asset should expect to earn a return that is ____ than average risky asset in the market.

Beta coefficient Beta coefficient and LESS

Statement 1: The profitability index approach may lead to incorrect decisions in comparisons of mutually exclusive projects. Statement 2: Because the actual net present value is unknown, firms typically use multiple criteria to evaluate a proposal. What do we say?

Both TRUE

Statement 1: The value of the firm is maximized when the WACC is minimized. Statement 2: Financial leverage acts to magnify gains and losses to shareholders.

Both TRUE

Dan reminds us that ____ arises from decisions that affect the left hand side of the balance sheet. _____ arises from decisions that affect the right hand side of the balance sheet.

Business risk; Financial risk

Bob asks us to determine the required rate of return for the Corp. Dividend yield is 2.0%. It just paid a dividend of $2 and is expected to pay a dividend of $2.14 one year from now. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return on Corps stock?

D1/Do 2.14/2.00 1.07 - 1.00 = .07 .02 + .07 = .09 = 9.0%

______ is the valuation calculating the present value of a future cash flow to determine its value today

Discounted cash flow valuation (DCF)

______ breaks down return on equity into 3 component parts: operating efficiency of the firm, its asset use efficiency, and financial leverage.

Du Point Identity

Net present value and other investment criteria Mr. bob tells us that to find the _____ we begin by setting the NPV of a project equal to zero.

Internal rate of return (IRR)

Underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock. It is called _____. Contract provision that gives the underwriter the option to purchase additional shares from the issuer at the offering price. It is ___.

Lock up agreement Green shoe provision

Bob reminds us that if we ignore taxes, financial distress costs, and other imperfections, we find that there is no optimal capital structure. The value of the firm is independent of its capital structure. What is the name of this theory.

M & M Proposition I

Company has just paid a cash dividend of $1 per share. Investors require an 8% return from investments such as this. If the dividend is expected to grow at a steady 4 percent per year, what is the current value of the stock?

Po=1 x (1 + .04)/.08 - .04 1 x 1.04/.04 1.04/.04 = $26

________ must be filed with the SEC that discloses all material information concerning the corporation making a public offering. The proper name for a company's first quit issue that is made available to the public is called an ____.

Registration statement Initial Public Offering

First stage of financing for Creative Bliss Enterprise. You the tell the audience at the Imaginerium that this level of financing is commonly known as:

Seed money

_____ is the compensation to the underwriter is determined by the difference between the underwriter's buying price and offering price.

Spread

Bob reminds us that bond prices and yields move in opposite directions. He also tells us that bond yields reflect the effect of six different things: the real rate and five premiums that investors demand as compensation for inflation, interest rate risk, default risk, taxability, and lack of liquidity. He asks us "if it is true that us treasury bonds are not rated and that the biggest borrower in the world is the US government? T or F?

T or F?

Tinker tells us that we will learn how firms go about determining the required return on a proposed investment. All projects must offer returns in excess of their required returns to be acceptable.

The after-tax cost of debt is more relevant, because it is the actual cost of debt to the company.

Tinkerbell has been successful in both the for profit and not for profit marketplace. In his overview of Financial Management, Mr. Bob tells us:

The goal of financial management is to maximize the current value per share of the existing stock.

The expected return for a particular asset depends on three things. Which best describes the following?

The pure value of money the amount of systematic risk the reward for bearing systematic risk

Father time tells us that systematic risk is considered important because ____

The risk premium on an asset is determined by its systematic risk.

Advertisements announcing a corporations public offering of securities, along with a list of investment banks handling the offering. Advertisements are called _____. Investment firms that act as intermediaries between a company selling securities and the investing public are called _____.

Tombstones Underwriters

Mom reminds us the WACC is the overall return the firm must earn on its existing assets to maintain the value of its stock. All else being the same, a lower corporate tax rate ____.

Will increase the WACC of a firm with debt and equity in its capital structure.

Mr. bob asks if all other components of a present value problem remain the same, what happens to the present value if we increase the interest rate?

the present value decreases


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