Consider the IPO (initial public offering) market. In this market, private firms raise money by selling a portion of their firm to the public (by listing their shares on a stock exchange). Suppose there are only two types of firms. Half of the firms are high quality and are worth $100/share. The other half are low quality and are worth only $50/share. Assuming firms know whether their quality, but the public does not, we would expect only v to sell their shares to the public at a price of $ v per share. One way to signal a firm's value is for the owner's to maintain equity in the firm. In order for high quality firms to signal their higher value, the cost of holding equity must be v for high quality firms than low quality firms.

Suppose you are an enterprising and creative entrepreneur who is considering a takeover of Itronic Listening Co. (ILC). You believe that under your management Itronic could sustain a dividend growth rate of 6% into the foreseeable future (they just paid a dividend of $2). But the takeover and subsequent changes to ILC's business will add more risk, so you will require a 14% return on your investment. What is the maximum price you should be willing to pay for the ILC stock?   $23.50 $25.00 $26.50 $28.50 $29.50

7. Diversification and risk The graph shows the relationship between risk, measured as the standard deviation of a stock portfolio's return, and the number of different stocks in the portfolio for a hypothetical stock market. RISK (Standard deviation of portfolio return) 60 20 01 4 True 10 20 30 NUMBER OF STOCKS IN PORTFOLIO True or False: Increasing the number of stocks in a portfolio reduces firm-specific risk. False 40 ?

You have been hired as a financial consultant by Himalaya Ltd. The CEO, Ms. Natasha Romanoff has just returned from a conference of top managers, held at a prestigious University in Australia where the issue of share buy-backs, dividends, and earnings per share (EPS) were debated. She was particularly puzzled after hearing the quote below: Share buybacks (repurchases) are going into the market and pumping up the price of your shares by using your own cash, not to invest in business. - (Elizabeth Warren, U.S. Senator,2021)Required:In light of the above statement write a short memorandum format report to the CEO, Natasha Romanoff to answer the following four questions raised by Ms. Romanoff.i. Discuss what dividends, EPS and share buybacks are?ii. Discuss at least TWO reasons why companies pay dividends to shareholders?iii. Based on the statement above by Elizabeth Warren (U.S. Senator) criticallyevaluate why companies may consider buying back its own shares. iv. Discuss at least TWO…

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