Chapter 4 Identifications Middle Ground: Middle ground refers to the land between the British and French empires. It was located between the Mississippi and Ohio river‚ and was home to many different tribes of Indians Backcountry: The back country was important because it had an abundance of water‚ causing its farms to grow very well without any outside aid. As the colonies grew‚ so did the population of people in the back-country as the planters grew in prosperity and power threatened to shift
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dividend growth rate is forecasted to be 6% forever. Risk-free rate is 3%‚ and market risk premium is 4%. Assume that Constant Dividend Growth Model and CAPM give you the same estimate of the cost of capital for equity‚ what is the beta of its stock? By the Constant Dividend Growth Model: Cost of Equity = D/P+g = 0.2/20+6%=7% By CAPM‚ cost of equity = R(f)+ beta * market risk premium = 3% + beta* 4%‚ Set this to be equal to 7%‚ solve for beta: beta=1 3. Firm ABC has a cost of equity of 8%‚ a
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Rate of return = Dividend yield = dividend/initial share price = $2/$40 = 0.05 = 5% Capital gains yield = capital gain/initial share price = $4/$40 = 0.10 = 10% 2. Dividend yield = $2/$40 = 0.05 = 5% The dividend yield is unaffected; it is based on the initial price‚ not the final price. Capital gain = $36 – $40 = −$4 Capital gains yield = –$4/$40 = –0.10 = –10% capital gain + dividend ($38 − $40) + $2 = = 0% initial share price $40 1 + nominal rate of return 1+ 0 −1 = − 1 = −0.0385 = −3
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financial distress costs. If there are no financial distress costs‚ capital structure theory argues that increasing debt can increase the value of the company because of the interest tax shield. 3. Yes he is correct‚ but the increase is irrelevant. 4. A regular dividend payment is something the company should probably not undertake. A company rarely begins regular dividend payments that it will be unable to continue in the future. Cessation of dividend payments is viewed a negative signal by the
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Solutions to questions 1. Finance involves three main areas—corporate finance‚ financial institutions and markets‚ and investments—that are closely related and complementary. For example‚ in corporate finance the central issues are how to acquire and employ or invest funds. To acquire funds a financial manager must deal with financial institutions‚ so some knowledge of the operations of financial institutions and markets is essential. Similarly‚ corporate finance involves investments because decisions
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Introduction to Corporate Finance 1. Two Questions: what investments should the corporation make and how should it pay for those investments? a. Investment decisions involve spending money and financing decisions involving raising money b. Concepts govern good financial decisions c. Financial managers value the shareholders’ investment opportunities outside their company because of the opportunity cost of capital contributed by shareholders d. All managers and employees need to pull together
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short on your spring break vacation‚ so you put €1‚000 on your credit card. You can only afford to make the minimum payment of €20 per month. The interest rate on the credit card is 1.5 percent per month. How long will you need to pay off the €1‚000? 4. Suppose you borrow €10‚000. You are going to repay the loan by making equal annual payments for five years. The interest rate on the loan is 14 percent per year. Prepare an amortization schedule for the loan. How much interest will you pay over the
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that it does not diminish or create shareholder wealth. Hence‚ Nolan’s argument that the company’s return and assets and return on equity will increase is not correct. However‚ the P/E ratio might go upwards for a time until the market corrects it. 4. Another option discussed by Tom‚ Jessica and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal? A plan to issue a regular dividend to shareholders is a start in establishing a dividend
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Chapter 4 Growth and Crisis in Colonial Society 1720-1765 Freehold Society in New England Puritans created a yeomen society of independent farm families who owned their land as freeholders- without feudal dues or leases by 1750‚ rapidly increasing population outstripped the supply of easily farmed land‚ challenging the freehold ideal. A. Farm Families: Women’s Place Men were head of the household no time for anything. They did many labors by 1750‚ family sizes decreased due
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pay down its debt? You are responsible for handing in written answers to the following questions drawn from the Massey-Ferguson case. You can work with others on this assignment‚ but each individual must hand in their own set of answers. 4. Net sales for Massey-Ferguson actually increased between 1979 and 1980. Despite this‚ net income and income from continuing operations both dropped sharply in 1980. Which item on the income statement was most responsible for this drop in income?
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