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An example of indirect finance is when the company issues new shares of stock
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- The Dividend-Discount Model (DDM) can only be used to value stocks that are currently paying dividends. True FalseWhen treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited? * Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value. Paid-in capital in excess of par for the purchase price. Treasury stock for the purchase price. Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value. When a share split occurs, the aggregate par value of issued shares will change. * True FalseWhen using discounted dividend method to estimate stock price, which of the following should be used as the discount rate? - required return of debt - risk free rate - required return of the equity - WACC - Bank deposit rate
- When additional shares of stock are issued, the earnings per share decreases (assuming no change in total earnings). Please explain how this occurs and what the impact on a firm’s decision to raise capital by equity, as oppose to debt.What would you expect to happen to an all-equityfirm’s stock price if its management announceda recapitalization under which debt would beissued and used to repurchase common stock?1. Explain the three varying characteristics of common shares. 2. What are flotation costs? 3. How is cost of common equity computed for no growth stock? for constant growth stock? 4.What is a dividend yield? 5. Define the following terms used in Capital Asset Pricing Model (CAPM) to compute for cost of equity: a. Risk-free rate b. Stock's Beta Coefficient C. Market risk premium 6. How is cost of equity under Bond Yield Plus Risk Premium Approach computed? 7. How is weighted average cost of capital (WACC) computed?
- Which one of the following is an example of mental accounting? Multiple Choice O associating a security's gains or losses based on its purchase price calculating the gain or loss on a security on a daily basis O computing the amount of tax due on the gain from a stock sale considering the gain realized when a stock pays a dividend comparing the gains and losses on a portfolio to those of the overall marketWhich of the following decreases total equity? A. A stock split B. Recording Revenue C. The purchase of Treasury Stock D. Issuance of Convertible preferred stockA dividend valuation model such as the following is frequent. where: Pi = the current price of Common Stock i D1 = the expected dividend in Period 1 ki = the required rate of return on Stock i gi = the expected constant-growth rate of dividends for Stock i Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds . Explain the principal problem involved in using a dividend valuation model to value: (1) companies whose operations are closely correlated with economic cycles. (2) companies that are of very large and mature. (3) companies that are quite small and are growing rapidly.