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Question
Explain the conditions under which the constant-growth dividend formula for the cost of common stock can be used to find the cost of common equity capital for a firm.Answer
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Related questions
Q:
Which of the following statements is NOT true?
A) For many smaller firms and firms of lower credit standing that have limited access, or no access, to the public markets, the cheapest source of external funding is often the private markets.
B) Bootstrapping and venture capital financing are not part of the private market.
C) The biggest drawback of private placements involves restrictions on the resale of the securities.
D) Many private companies that are owned by entrepreneurs, families, or family foundations and are sizable companies of high credit quality prefer to sell their securities in the private markets.
Q:
Bethesda Biosys issues an IPO on a best-effort basis. The company's investment bank demands a spread of 18 percent of the selling price. The average selling price remains at $25 per share. Four million shares are issued. What are the net proceeds for the issuer?
A) $82 million
B) $92 million
C) $100 million
D) None of the above
Q:
Pau, Inc. issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $270,000. The firm's stock price increases 18 percent on the first day. What is the total cost of issuing the securities to the firm?
A) $13,606,000
B) $20,818,000
C) $20,610,000
D) None of the above
Q:
Stump, Inc. a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. What is the underpricing on this issue?
A) $9,900,000
B) $24,900,000
C) $15,000,000
D) None of the above
Q:
Tactics that venture capitalists use to reduce the risk of their investment include
A) funding the ventures in stages, requiring entrepreneurs to take charge of all important business decisions .
B) funding the ventures completely in the beginning, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize.
C) funding the ventures in stages, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize.
D) None of the above
Q:
A general cash offer is a sale of debt or equity, open to all investors, by a registered public company that has previously sold stock to the public.
A) True
B) False
Q:
In the firm-commitment underwriting, which is more typical, the investment banker guarantees the issuer a fixed amount of money from the stock sale.
A) True
B) False
Q:
A venture capitalist may exit an investment by selling common stock in an initial public offering.
A) True
B) False
Q:
A significant number of venture capital firms focus on mature businesses.
A) True
B) False
Q:
A significant number of venture capital firms focus on high-technology investments.
A) True
B) False
Q:
A firm sells $125,000 of its accounts receivable to factors at 3 percent discount. The firm's average collection period is one month. What is the dollar cost of the factoring service?
A) $3,000
B) $4,500
C) $3,750
D) $4,250
Q:
Storm Electronics has set up a formal line of credit of $2 million with First Kentucky Bank. The line of credit is good for up to three years. The bank will be charging them an interest rate of 6.25 percent on the loan, and in addition the firm will pay an annual fee of 60 basis points on the unused balance. The firm borrowed $1,500,000 on the first day the credit line became available. What is the firm's effective interest rate on this line of credit? Round your final percentage answer to two decimal places.
A) 7.50%
B) 6.45%
C) 6.25%
D) 7.15%
Q:
Porter Corp. has just signed up for a lockbox. Management expects the lockbox to reduce the mail float by 2.3 days. The firm's sales on average are $41,250 a day, with the average check being $165. The bank charges $0.39 per processed check. Assume that there are 270 business days in a year and the opportunity cost of funds is 5 percent. What will the firm's savings be from using the lockbox?
A) $3,427.50
B) $975.50
C) $2,632.50
D) $94,875.00
Q:
What is the number of cars per order? Round your final answer to the nearest whole number.A) 80 carsB) 101carsC) 58 carsD) 113 cars
Q:
You own a share of common stock in Vibrapower, Inc., which is currently trading for $18 and will either rise to $30 or fall to $12 in one year. Assume the risk-free rate for one year is 0 percent. You also own an American put option on the stock with a strike price of $20, which expires in one year. What is the value of the put option, and what would be the net payoff from exercising the option now? (Do not round intermediate computations. Round final answer to two decimal places.)A) Option value: $3.33, Net payoff $2B) Option value: $3.33, Net payoff $6C) Option value: $5.33, Net payoff $2D) Option value: $5.33, Net payoff $6
Q:
Assume that the stock of Phoneeffect, Inc., is currently trading for $16 and will either rise to $23.50 or fall to $9 in one year. The risk-free rate for one year is 3 percent. What is the value of a put option with a strike price of $18 that expires in three months? (Do not round intermediate computations. Round final answer to two decimal places.)
A) $0
B) $2.75
C) $4.23
D) $5.73
Q:
The standard deviation of the return on a stock is 25% per year. Compute the standard deviation over two years. (Round your intermediate answer to 3 decimal places.)A) 30.35%B) 35.35%C) 12.25%D) 25.00%
Q:
Consider a put option with a strike price of $40, which expires in one year. The risk-free rate of interest is 8 percent. The current underlying stock price is $20. Without arbitrage, which of the following is a possible price for the put option? (Round intermediate computations to two decimal places.)
A) $0.50
B) $16.20
C) $25.00
D) $10.20
Q:
What is the payoff for the owner of a put option with a strike price of $63 if the underlying stock price at expiration is $43?
A) $126
B) $43
C) $20
D) $63
Q:
Adding stock options and bonuses for performance to the compensation of a manager is intended to closer align the interest of the manager with:
A) stockholders.
B) lenders.
C) employees.
D) public.
Q:
The claim lenders' hold on cash flows in a company with outstanding risky debt is often thought of as:
A) holding a call option on the firm's assets.
B) holding a put option on the firm's assets.
C) selling a put option on the firm's assets and holding a risk-free bond.
D) selling a call option on the firm's asset and holding a risk-free bond.
Q:
Bifive Homes, Inc., is a developer of planned residential communities. It has entered into an option contract with a land owner outside Austin, Texas. It will pay the land owner $100,000 for the option to buy the land in two years at a price of $20 million. During that time Bifive Homes will evaluate population and real estate trends in Austin. Its plan is to buy the land if real estate prices in Austin increase enough that developing the land would be worth more than the $20 million price. The $20 million purchase price resembles:
A) the premium price of a put option on the land.
B) the premium price of a call option on the land.
C) the strike price of a put option on the land.
D) the strike price of a call option on the land.
Q:
When the value of the firm is above the face value of the debt:
A) the stockholders repay the debt and the equity is worth less than $0.
B) the stockholders repay the debt and the equity is worth the difference between the firm value and the face value of the debt.
C) the stockholders default and the lenders receive the value of the firm.
D) the stockholders default and the equity is worth $0.
Q:
The management at PhoneUn considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to be easily converted to manufacture other types of large machinery. If its new line of cars is poorly received, its plant should be easy to sell to another manufacturing company. In this example, the price at which they expect to sell the plant if things go poorly resembles:
A) the premium of a put option on the plant.
B) the premium of a call option on the plant.
C) the strike price of a put option on the plant.
D) the strike price of a call option the plant.
Q:
What happens to the value of call and put options if the volatility of the price of underlying asset decreases?
A) Put options will be worth more, call options will be worth less.
B) Put options will be worth less, call options will be worth more.
C) Both call and put options will be worth more.
D) Both call and put options will be worth less.
Q:
Which of the following statements is true of a call option?
A) The value of a call option can never be positive.
B) The value of a call option can be more than the value of the underlying asset.
C) The value of a call option can never be worth less than the current value of the asset minus present value of the strike price.
D) The value of a call option can be worth more than the strike price.
Q:
Harmostrax Co. has a defined-benefit pension plan for its employees. To fund the plan, the company makes periodic contributions to a stock investment fund. If the stock market declines significantly, the company would have to make additional contributions to make up for lost revenue. The company could hedge its risk of a market downturn by periodically purchasing put options on the stock market.
A) True
B) False
Q:
After taking into account the value of real options, it is possible that some projects with a negative NPV should be pursued.
A) True
B) False
Q:
If a firm adds financial options to its debt securities, it will increase the interest expense to the firm.
A) True
B) False
Q:
Consider a call option on a stock with a strike price of $60. If the stock price at expiration is $50, the payoff from the call option is $10.
A) True
B) False