Answered: 1. An investor is contemplating the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 13P

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Related questions

Question

1. An investor is contemplating the purchase of common stock at the beginning of this year and to hold the stock for one year. The investor expects the year-end dividend to be P2.00 and expects a year-end price for the stock of P40. If this investor’s required rate of return is 10%, then the value of the stock to this investor is:

P33.06.

P34.88.

P36.36.

P38.18.

2. If the return on the market portfolio is 10% and the risk-free rate is 5%, what is the effect on a company's required rate of return on its stock of an increase in the beta coefficient from 1.2 to 1.5?

3% increase

1.5% decrease

No change

1.5% increase

3. ABC Company’s cost of equity is 18%, its before-tax cost of debt is 8%, and its corporate tax rate is 40%. Given the following balance sheet, calculate the after-tax weighted-average cost of capital.

Assets		Liabilities
Cash	P 100		Accounts payable	P 200
Accounts Receivable	400		Accrued taxes due	200
Inventories	200		Long-term debt	400
Plant & equipment	1,300		Equity	1,200
	P2,000			P2,000