EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 7, Problem 9QP
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A) Suppose that Facebook has earnings per share (expected next year) of $6.20 and that Facebook’s discount rate for equity is 12%. If Facebook is not expected to grow at all, what would Facebook’s share price be? Do not include the $ sign and answer to the nearest $0.01.
B) Instead, Facebook is trading at $160 per share. What is the present value of Facebook’s growth opportunities per share? Do not include the $ sign and answer to the nearest $0.01.
Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?
a. The times-interest-earned ratio will decrease.
b. Net income will decrease.
c. Taxable income will decline.
d. The ROA will decline.
e. The tax bill will increase.
Chapter 7 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
Ch. 7 - Prob. 1QPCh. 7 - Prob. 2QPCh. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Prob. 5QPCh. 7 - Prob. 8QPCh. 7 - Dividend Discount Model. Amazon has never paid a...Ch. 7 - Prob. 10QPCh. 7 - Prob. 11QPCh. 7 - Prob. 12QP
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- Ab. 127.arrow_forwardQuestion 7. The market capitalisation of Tesla fell from about $1tr at the beginning of Jan 2022 to about $330bn at the end of Jan 2023 in spite of car deliveries increasing by 40% year on year. Part of the drop was believed to be associated with the fact that Tesla's founder sold a substantial holding of shares in Tesla to fund his acquisition of Twitter. How consistent is this evidence with markets being efficient? Explain.arrow_forwardA publicly listed traded company is in financial distress. It is projected to stop paying dividends and is likely to stop trading as a going concern in the near future. Which of the following valuation methods would most likely be appropriate? O A. Asset based valuation O B. Relative valuation using price to earnings ratio OC. Discounted dividend model with single period of growtharrow_forward
- 7. Dividend discount model (S4.3) Company Y does not plow back any earnings and is expected to produce a level dividend stream of $5 a share. If the current stock price is $40, what is the cost of equity?arrow_forwardWhy are dividends important in determining the present value of a share? How would you account for the positive market value of company’s share which currently pays no dividend? (300 words)ASAParrow_forwardState whether the following statement is true or false and provide a written explanation of your answer. “The Dividend Growth Model (a.k.a Gordon Model) is a ridiculous model to use to value a share. Firstly, it assumes that the company will be around forever, whereas we know that lots of companies will eventually disappear because of takeovers and mergers and this model doesn’t allow for that. Secondly, it assumes that dividends grow at the rate of inflation which is not necessarily correct.”arrow_forward
- [multiple choice questions] INDO Inc. always pays all of its earnings as dividends, and therefore has no retained earnings. The same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity. The targeted capital structure consists of: common stock, preferred stock, and debt. Which of the following events will reduce WACC? a. The market risk premium is decreasing. b. Flotation costs associated with issuing new common stock increase. c. The company's beta is increasing. d. Inflation is expected to increase. e. The flotation costs associated with issuing preferred stock increase.arrow_forwardWHY DO YOU SOME P/E RATIOS OF STOCKS ARE LOWER THAN OTHERS?arrow_forwardFAMA is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate FAMA pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue? a. The times interest earned ratio will decrease. b. The ROA will decline. c. Taxable income will decrease. d. The tax bill will increase. e. Net income will decrease. Please explain answer.arrow_forward
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