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GAI Insurance Inc. is interested in investing in the shares of SSC Inc. SSC's common shares are currently selling at $51.22 per share and its free cash flows (FCF) for the most recent fiscal year are $0.60 per share. The required rate of return on the shares is 5%. Based on its extensive investigation, GAI believes that SSC will generate free cash flows of $1.10 per share next year, $1.40 per share the following year, and $1.75 per share in three years, following which SSC's FCF are expected to grow at an average rate of 2% per year. Based on this information, which of the following statements is correct? O 1. GAI should not invest because the shares are currently overpriced O 2. GAI should invest because the shares are currently underpriced O 3. GAI should invest because the shares are currently overpriced O 4. GAI should not invest because the shares are currently underpriced

GAI Insurance Inc. is interested in investing in the shares of SSC Inc. SSC's common shares are currently selling at $51.22 per share and its free cash flows (FCF) for the most recent fiscal year are $0.60 per share. The required rate of return on the shares is 5%. Based on its extensive investigation, GAI believes that SSC will generate free cash flows of $1.10 per share next year, $1.40 per share the following year, and $1.75 per share in three years, following which SSC's FCF are expected to grow at an average rate of 2% per year. Based on this information, which of the following statements is correct? O 1. GAI should not invest because the shares are currently overpriced O 2. GAI should invest because the shares are currently underpriced O 3. GAI should invest because the shares are currently overpriced O 4. GAI should not invest because the shares are currently underpriced

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
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answer only 23 but with explanation

QUESTION 23 GAI Insurance Inc. is interested in investing in the shares of SSC Inc. SSC's common shares are currently selling at $51.22 per share and its free cash flows (FCF) for the most recent fiscal year are $0.60 per share. The required rate of return on the shares is 5%. Based on its extensive investigation, GAI believes that SSC will generate free cash flows of $1.10 per share next year, $1.40 per share the following year, and $1.75 per share in three years, following which SSC's FCF are expected to grow at an average rate of 2% per year. Based on this information, which of the following statements is correct? O 1. GAI should not invest because the shares are currently overpriced O 2. GAI should invest because the shares are currently underpriced O 3. GAI should invest because the shares are currently overpriced O 4. GAI should not invest because the shares are currently underpriced QUESTION 24 Yashin Inc. plans to issue new long-term bonds to finance a $5 million plant expansion. The expanded plant will operate using new robotic technology with a resultant decrease in variable operating costs. What impact will the new debt have on the operating and financial leverage of Yashin Inc.? O 1. Both its operating and financial leverage will decrease O 2. It's operating leverage will decrease and its financial leverage will increase O 3. Neither it's operating nor financial leverage will change O 4. Both its operating and financial leverage will increase
Transcribed Image Text:QUESTION 23 GAI Insurance Inc. is interested in investing in the shares of SSC Inc. SSC's common shares are currently selling at $51.22 per share and its free cash flows (FCF) for the most recent fiscal year are $0.60 per share. The required rate of return on the shares is 5%. Based on its extensive investigation, GAI believes that SSC will generate free cash flows of $1.10 per share next year, $1.40 per share the following year, and $1.75 per share in three years, following which SSC's FCF are expected to grow at an average rate of 2% per year. Based on this information, which of the following statements is correct? O 1. GAI should not invest because the shares are currently overpriced O 2. GAI should invest because the shares are currently underpriced O 3. GAI should invest because the shares are currently overpriced O 4. GAI should not invest because the shares are currently underpriced QUESTION 24 Yashin Inc. plans to issue new long-term bonds to finance a $5 million plant expansion. The expanded plant will operate using new robotic technology with a resultant decrease in variable operating costs. What impact will the new debt have on the operating and financial leverage of Yashin Inc.? O 1. Both its operating and financial leverage will decrease O 2. It's operating leverage will decrease and its financial leverage will increase O 3. Neither it's operating nor financial leverage will change O 4. Both its operating and financial leverage will increase
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