NM has no debt. Its assets will be worth 600 million in one year if the economy is strong, but only 300 million if the economy is weak. Both events are equally likely. The market value today of NM's assets is 400 million. Suppose the risk free interest rate is 4%. If NM borrows 150 million today at this rate and uses the proceeds to pay an immediate cash dividend, then according to MM, the expected return of NM's stock just alter the dividend is paid would be closest to: A: -12.5% B: -17.5% C: 12.5% D:17.5%
NM has no debt. Its assets will be worth 600 million in one year if the economy is strong, but only 300 million if the economy is weak. Both events are equally likely. The market value today of NM's assets is 400 million. Suppose the risk free interest rate is 4%. If NM borrows 150 million today at this rate and uses the proceeds to pay an immediate cash dividend, then according to MM, the expected return of NM's stock just alter the dividend is paid would be closest to: A: -12.5% B: -17.5% C: 12.5% D:17.5%
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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Transcribed Image Text:NM has no debt. Its assets will be worth 600 million in one year if the economy is strong, but only 300 million
if the economy is weak. Both events are equally likely. The market value today of NM's assets is 400 million.
Suppose the risk free interest rate is 4%. If NM borrows 150 million today at this rate and uses the proceeds to
pay an immediate cash dividend, then according to MM, the expected return of NM's stock just alter the
dividend is paid would be closest to:
A: -12.5% B: -17.5% C: 12.5% D:17.5%
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