Contemporary Engineering Economics (6th Edition)
6th Edition
ISBN: 9780134105598
Author: Chan S. Park
Publisher: PEARSON
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Chapter 15, Problem 7P
To determine
Calculate the cost of
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G&M Motors is currently an all equity financed firm. It expects to generate EBIT of $30 million over the next year. Assume that G&M Motors’ EBIT is not expected to grow in the future and that all earnings are paid out as dividends.
Currently G&M has 10 million shares outstanding and its stock is trading at $40.00 per share. G&M is considering changing its capital structure by borrowing $100 million at an interest rate of 2% and using the proceeds to repurchase shares at its current price ($40.00 per share). Assume perfect capital markets.
After the re-capitalisation, G&M ʹs earnings per share (EPS) and the equity cost of capital are closest to:
A.
$2.90 and 14.55%
B.
$3 and 7.5%
C.
$3.73 and 9.3%
D.
$2.8 and 10.8%
If an investor would like to sell short shares originally valued at $20,000 in which his/her cash
contribution is $10,000, what is the stock value when the investor receives a margin call given the
maintenance margin of 30%?
The current stock value increases to $23,874
The current stock value increases to $23,077
The current stock value increases to $22,428
The current stock value decreases to $22,428
An analyst gathered the following
information regarding Beta Corporation:
Current dividend per share = $2.18
Next year's expected dividend growth rate of
30% is expected to decline linearly over the
following 8 years to a long-term constant
growth rate of 6%.
Řequired rate of return on the company's
stock is 11%.
The value of the company's stock today is
closest to:
1. 41.86
2.98.54
3.88.07
Chapter 15 Solutions
Contemporary Engineering Economics (6th Edition)
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