Chapter 5, Problem 3BIC

Use attachment to answer the following  Required: a. Calculate return on common equity and disaggregate ROCE for Years 5 and 9 using end-of-year values for com- putations requiring an average (assume fixed assets and working capital are operating and a 50% tax rate). b. Comment on Texas Telecom’s use of financial leverage.

Altmans bankruptcy risk model utilizes the values of the variables at a particular point in time (balance sheet variables) or for a period of time (income statement values). An alternative would be to use changes in balance sheet or income statement amounts. Why might the levels of values in Altmans model be more appropriate than changes for predicting bankruptcy?

Halverson's times interest earned ratio was 2.98 in 2022, 2.79 in 2021, and 2.31 in 2020. Which of the following statements about the ratio is correct? Multiple Choice The increasing ratio implies increased long-term debt financing The increasing ratio indicates decreasing levels of debt on which interest is incurred The increasing ratio would be considered by creditors to be an indicator of higher risk The increasing ratio indicates the strategy of pursuing growth by investment in other companies, which has increased debt, but Halverson's profts have not yet increased from those investments.

The equity versus debt decision relies on a large number of factors such as the existing capital structure of the business, the current economic state and the business life cycle stage (CFI,2019). And the best capital structure for a business is the capital structure that minimizes the business’s WACC. To be more specific, the cost of equity is higher compared to the cost of debt since the investors take more risk when purchasing a company’s stock compared to purchasing a company’s bond. Thus, financing purely with equity will lead to high WACC. In that case which one do you think will be more efficient in maximizing the firm value?

Which of the following situations will most likely motivate managers to infl ate earnings inthe current period?A . Possibility of bond covenant violationB . Earnings in excess of analysts’ forecastsC . Earnings that are greater than the previous year

The value of an asset is the present value of the expected returns from the asset during theholding period. An investment will provide a stream of returns during this period, and it isnecessary to discount this stream of returns at an appropriate rate to determine the asset’spresent value. A dividend valuation model such as the following is frequent. where:Pi = the current price of Common Stock iD1 = the expected dividend in Period 1ki = the required rate of return on Stock igi = the expected constant-growth rate of dividends for Stock iA. Identify the three factors that must be estimated for any valuation model, and explain whythese estimates are more difficult to derive for common stocks than for bonds.B. 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.

How is AIC currently valued in the stock market? (under, over, fairly) Your firm's client makes her investment decisions based on research report and requires 30% margin safety. What would be her investment decision if AIC price falls to $40?

Which of the following is NOT right for the buy-and-hold investment strategy? Takes continuous efforts to select stocks that have good potential. Minimizes brokerage fees, transaction costs. Involves buying stock and holding it for a period of years. Avoids timing the market. Postpones capital gains taxes.

Using Past Information to Estimate Required Returns Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. Chapter 8 discussed the basic trade-off between risk and return. In the capital asset pricing model (CAPM) discussion, beta was identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would like to know how the stock will move with the market in the future, but because we dont have a crystal ball, we generally use historical data to estimate this relationship with beta. As mentioned in Web Appendix 8A, beta can be estimated by regressing the individual stock's returns against the returns of the overall market. As an alternative to running our own regressions, we can rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various Internet websites. 4. Select one of the four stocks listed in question 3 by entering the company's ticker symbol on the financial website you have chosen. On the screen you should see the interactive chart. Select the six-month time period and compare the stock's performance to the SP 500's performance on the graph by adding the SP 500 to the interactive chart. Has the stock outperformed or underperformed the overall market during this time period?