Q4. (a) "For most investment decisions that a firm faces, NPV is either a superior decision criterion orat least it is considered a good technique to decide for investment." What are your considerations? Doyou think that other techniques can also provide better results while taking investment decision? IfYes, please elaborate.Q4. (b) J & K Ltd. Provided the following information related to the book values of debentures andequity:Equity Share Capital40,00,00012% Preference shares10,00,00010% Debentures30,00,000The equity share of the company sells for Rs. 20 and company has taken decision of providingdividend of Rs 2 per equity share. The dividend will further grow at 5% forever. Tax rate is 35%. Youare required to compute weighted average cost of capital (WACC) based on the given information.Company is planning to raise Rs 20,00,000 by issuing 12 % debentures, but then equity share pricewill fall to Rs. 16 per share and company has to increase dividend to Rs. 2.40, growth rate remainsunchanged. Do you think this will have some impact on WACC, if Yes, then calculate new WACC andcompare with the previous one.

NPV or net present value technique is a modern technique for evaluating investment alternatives.…

Answered: Q4. (a) "For most investment decisions…

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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Hi! I'm having difficulty comparing the choices between raising a large amount of cash in the capitaal market verses the bond market. I have to make a decision as to what is best and why, all while considering ethical implications of financial reporting and how it relates to acquiring additional investors and accessing markets for additional capital. Consider the impact on the following on your choice: The company’s existing capital structure The company’s current market capitalization The company’s weighted average cost of capital The company’s degree of operating, financial and combined leverage
The cost of a firmʹs equity Group of answer choices a. is independent of the firmʹs capital structure b. will always be higher than the stated interest rate on the financial debt of the firm c. can be substantially higher than the firmʹs weighted average cost of capital d. must always be less than the firmʹs weighted average cost of capital
To eliminate all risk (including credit risk) an American company with a contract to sell goods to a foreign country can hedge by purchase a forward rate contract. O No answer text provided. O True O No answer text provided. O False
Interpretation No. 46R relates to the issue of whether an investing firm is the primary beneficiary in a variable-interest entity. When is an entity classified as a variable interest entity? Starting with free cash flows from operations, discuss how an analyst would measure free cash flows to common equity shareholders.
which one is correct please confirm? QUESTION 37 Which of the following statements is true concerning companies that do not pay dividends? a. The cost of equity capital can be estimated using the Capital Asset Pricing Model. b. The cost of equity capital is equal to the growth short-term rate of earnings per share. c. The dividend capitalization model can be used to determine an accurate cost of equity capital. d. None of these are correct
8. Each of the following is sometimes listed as a reasonable objective for a firm: (a) maximize profit (accounting income), (b) maximize sales (or share of the market), (c) maximize the value of a share of common stock t time periods from now, (d) ensure continuity of existence, (e) maximize the rate of growth, (f) maximize future dividends. Discuss each item and the extent of its relevance to the making of investment decisions.
Question 77 For the following, fill in the blanks with the appropriate term(s). For questions that give you two or three choices to choose from, circle the most appropriate. (7.1) The return on an investment comes in two forms: the and the two forms: component gain or loss. The return on investment in common stock comes in gains (or losses).. and gains (or losses) for an investment in common stock arise from in the value of the investment. (7.2) The total percentage return for an investment in common stock is the sum of the yield and the [(Pt+1-P)/ Pt] The gains yield. The dividend yield is defined algebraically as gains yield is defined algebraically as (7.3) The debt represented by T-bills is virtually free of any life. We will call the rate of return on such debt the over its short and we will use it as a kind of benchmark. The difference between the rate of return for a risky investment and the return on T-bills is the for the risky asset. som levo (7.4) An investor's portfolio is…
Figure 2 (a) Financial engineering deals with the design of new assets. Draw the payoff (at t=1) of the following butterfly spread: payoff of portfolio Purchase 1 call with exercise price a Sell 2 calls with exercise price (atb)/2 Purchase 1 call with exercise price b as a function of the underlying stock price S at t=1 where a=120 and b=140. (b) An individual agent thinks that there is a high probability that the Dow Jones will have a payoff (or points) between a=34,000 and b-36,000 at t=1. 1=nd Design a digital option (see Figure 1) as a sequence of calls on the Dow that converges to a pure bet on getting $1 on the interval [34,000, 36,000]. ie, if the Dow lies between SE[34,000, 36,000] at t=1, then the portfolio of calls pays off exactly $1. The payoff is 0 otherwise. a+8 Figure 1 (Digital option) payoff a=34,000 b-36,000 S. Hint: You have to modify the sell strategies of a butterfly spread to obtain a payoff as given in Figure 2 and then adjust n and 8 appropriately.
BIE The Cost of Capital: Weighted Averige cost of capital The firm's target capital structure is the mix of debt, presured stack, and common equity the firm plans to mise funds for future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these I components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common study then the cost of retained earnings is used in the firm's WACC calculation. However, if the firm will I have to issue new common stock, the cost of new common stock should be used in the firm's WALC calculation. Barton Industines expects that its target capital Structure for finds in the future for its raising capital budget will consist of 40% debt, 5% prefence stock, and 55% common equity. Note that the firm's marginal tax rate is 25%. Assume that the firm's cost of debt, rd is 10.0%, the firm's cost of preferred stock, rp is 9.2.%. and the firm's cost of…

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