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A firm is expecting a: • $2 dividend to be paid to shareholders in one year (t=1); • $5 dividend the year after (t=2); and from then on the • 2% inflation rate is the expected growth rate of the annual dividend which will be paid annually forever; • 9% pa required return on equity. All returns and cash flows are given as nominal figures. Which of the following statements is NOT correct? O a. The real capital return in the first year is 4.28% O b. The price today is $67.37 Oc. The real growth in the annual dividend after year 2 is 0% O d. The price in one year from now (t=1), just after the $2 dividend is paid is $71.43 O e. The nominal capital return in the first year is 6.03%

A firm is expecting a: • $2 dividend to be paid to shareholders in one year (t=1); • $5 dividend the year after (t=2); and from then on the • 2% inflation rate is the expected growth rate of the annual dividend which will be paid annually forever; • 9% pa required return on equity. All returns and cash flows are given as nominal figures. Which of the following statements is NOT correct? O a. The real capital return in the first year is 4.28% O b. The price today is $67.37 Oc. The real growth in the annual dividend after year 2 is 0% O d. The price in one year from now (t=1), just after the $2 dividend is paid is $71.43 O e. The nominal capital return in the first year is 6.03%

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A firm is expecting a: • $2 dividend to be paid to shareholders in one year (t=1); • $5 dividend the year after (t=2); and from then on the • 2% inflation rate is the expected growth rate of the annual dividend which will be paid annually forever; • 9% pa required return on equity. All returns and cash flows are given as nominal figures. Which of the following statements is NOT correct? O a. The real capital return in the first year is 4.28% O b. The price today is $67.37 Oc. The real growth in the annual dividend after year 2 is 0% O d. The price in one year from now (t=1), just after the $2 dividend is paid is $71.43 O e. The nominal capital return in the first year is 6.03%
Transcribed Image Text:A firm is expecting a: • $2 dividend to be paid to shareholders in one year (t=1); • $5 dividend the year after (t=2); and from then on the • 2% inflation rate is the expected growth rate of the annual dividend which will be paid annually forever; • 9% pa required return on equity. All returns and cash flows are given as nominal figures. Which of the following statements is NOT correct? O a. The real capital return in the first year is 4.28% O b. The price today is $67.37 Oc. The real growth in the annual dividend after year 2 is 0% O d. The price in one year from now (t=1), just after the $2 dividend is paid is $71.43 O e. The nominal capital return in the first year is 6.03%
If a company issues shares, and uses the proceeds to repay a loan, which of the following statements is NOT correct? O a. the after tax weighted average cost of capital (WACC) will increase due to the lower interest tax shield from having more debt. O b. the company will pay more tax to the government due to lower tax shields. The before tax WACC will be unchanged as assets (and required return on assets) will be unchanged. O d. the company's expected levered firm free cash flow (FFCF or CFFA) will be lower due to the increased tax payment. Due to the increased leverage, both gains and losses made by the company will be further magnified. O e.
Transcribed Image Text:If a company issues shares, and uses the proceeds to repay a loan, which of the following statements is NOT correct? O a. the after tax weighted average cost of capital (WACC) will increase due to the lower interest tax shield from having more debt. O b. the company will pay more tax to the government due to lower tax shields. The before tax WACC will be unchanged as assets (and required return on assets) will be unchanged. O d. the company's expected levered firm free cash flow (FFCF or CFFA) will be lower due to the increased tax payment. Due to the increased leverage, both gains and losses made by the company will be further magnified. O e.
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