During the 1990s and 2000s, many firms repurchased stock and borrowed to do so. (i) What is the typical effect of stock repurchases on earnings per share growth and return on common equity? (ii) Predict how a firm that excessively engaged in these practices would have fared in the downturn in 2008?
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During the 1990s and 2000s, many firms repurchased stock and borrowed to do so.
(i) What is the typical effect of stock repurchases on earnings per share growth and return on common equity?
(ii) Predict how a firm that excessively engaged in these practices would have fared in the downturn in 2008?
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- When considering a top-down approach to fundamental analysis, the impact of macroeconomic factors on a stock’s price can have which of the following effects? an increase in real GDP is followed by improvement in current and expected future profits for companies, leading to higher stock price. an increase in real GDP is followed by performance of industries and subsequent improvement in current and expected future profits for companies, leading to higher stock prices. an increase in real GDP, followed by a significant performance of cyclical industries such as automobile and consumer discretionary, will lead to higher stock prices.What was the result of market during the flash crash of 2010? high-frequency traders' leaving the Market volatility decreased. Market liquidity increased. Trading frequency increased. Market liquidity decreased.Given the dramatic decrease in a company's stock price last year, what would be the impact on the firm's asset beta, equity beta, and their WACC? Explain your responses!
- Empirical research on payout patterns in recent years indicates that Group of answer choices since 2000, firms are paying higher dividends and executing fewer stock repurchases after the Tech crash in March 2000, investors began to demand more dividends and firms obliged fewer firms are paying dividends since the Tech crash in March 2000 since 2000, firms are paying lower dividends and executing more stock repurchasesA firm is planning to borrow money to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. There are no taxes. a. Will earnings per share always increase after such an action? Explain.b. Will the higher earnings per share always translate into a higher stock price? Explain.c. Under what conditions will such a transaction lead to a higher price?Burnham Brothers Inc. has no retained earnings since it has always paid out all of its earnings as dividends. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC? The market risk premium declines. The flotation costs associated with issuing new common stock increase. The company's beta increases. Expected inflation increases. The flotation costs associated with issuing preferred stock increase.
- Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results. Required: 1. How can a company manage earnings by changing its depreciation method? Is this an effective technique to manage earnings? 2. How can a company manage earnings by changing the estimated useful lives of depreciable assets? Is this an effective technique to manage earnings? 3. Using a fictitious example and numbers you make up, describe in your own words how asset impairment losses could be used to manage earnings. How might that benefit the company?As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $1.68 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 4.00% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Dividends one year from now (D1) Horizon value (P₁) Intrinsic value of Portman's stock ValueA publicly listed traded company is in financial distress. It is projected to stop paying dividends and is likely to stop trading as a going concern in the near future. Which of the following valuation methods would most likely be appropriate? O A. Asset based valuation O B. Relative valuation using price to earnings ratio OC. Discounted dividend model with single period of growth
- As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $3.12 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 3.20% per year.As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $1.92 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 2.40% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Value Dividends one year from now (D₁) Horizon value (Pˆ1P̂1) Intrinsic value of Portman’s stock The risk-free rate (rRFrRF) is 3.00%, the market risk…(a). Large businesses spend millions of dollars annually on insurance. Why? Should they insure against all risks or does insurance make more sense for some risks than others? (b). Why might firms prefer to fund investments using retained earnings or debt rather than issuing equity? (c). How does asymmetric information explain the negative stock price reaction to the announcement of an equity issue?