A firm is planning to issue bonds to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. Will the higher earnings per share always translate into a higher stock price? a. No b. Depends on stock price c. Yes d. Indifferent
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A firm is planning to issue bonds to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share.
Will the higher earnings per share always translate into a higher stock price?
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- a. What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? b. Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. c. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?Evaluate the following statement: When a firm pays dividend, its stock price decreases in the market. Therefore, it is always better to buy a stock on the date of dividend payment.If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion? O 1. The stock offers a high dividend payout ratio. O 2. The market is overvaluing the stock. O 3. The stock has a low level of risk. O 4. The market is undervaluing the stock.
- Explain whether the following statements are true or false. Justify your answer and solve both the parts of this question. a) The income from bond is more uncertain compared to the income from shares b) Managers want to maximize the intrisic value of the stock not the market price of the stock."The dividend discount model is used to find the price of a stock based on the expected dividends received by the shareholder and the discount rate. Therefore, all else constant, the price of a share of stock will increase if the discount rate decreases." A) True B) False[S1] If an individual stock's beta is higher than 1, that stock is riskier than the market. [S2] In determining the estimated cost of equity, the CAPM explicitly recognizes a firm’s risk but it does not rely on any dividend assumptions or growth of dividends.a. both are trueb. both are falsec. S1 is trued. S2 is true
- Which of the following statements is NOT true? A. Stock owners benefit from stock price increases B. Higher stock prices allow companies access to more capital C. Common stocks are not securities D. Stock prices tend to be very volatileSelect all that are true with respect to a Price/Earnings (P/E) ratio. Group of answer choices Low P/E stocks are good investments, high P/E stocks are bad investments. A P/E ratio tells you how much you pay per $1 of a firm's earnings when you buy the stock. A P/E ratio tells you the ratio of a firm's stock price relative to its earnings per share. A stock that trades at a P/E of 10 is a better investment than a stock that trades at a P/E of 20. A stock that trades at a P/E of 20 is a better investment than a stock that trades at a P/E of 10. Although not always the case, stocks with higher P/E ratios generally have higher growth prospects relative to their current level of earnings than stocks with lower P/E ratios.Which of the following statements is FALSE? Select one: O In recent years, an increasing number of firms have replaced dividend payouts with share repurchases. O The price of a share of stock is equal to the present value of the expected future dividends it will pay. O The law of one price implies that to value any security, we must determine the expected cash flows an investor will receive from owning it. O The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders, O An investor might generate cash by choosing to sell the shares at some future date. O Fulture dividend payments and stock prices are not known with certainty: rather these values are based on the investor's expectations at the time the stock is purchased. O The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price. O In the dividend discount model, we implicitly assume that any cash paid out to the shareholders takes the…
- Which of the following statements is most likely FALSE? ... O A. We should use the general dividend discount model to value the stock of a firm with rapid or changing growth. O B. As firms mature, their growth slows to rates more typical of established companies. Oc. The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.2. What are flotation costs? 3. How is cost of common equity computed for no growth stock? for constant growth stock? 4.What is a dividend yield? 5. Define the following terms used in Capital Asset Pricing Model (CAPM) to compute for cost of equity: a. Risk-free rate b. Stock's Beta Coefficient C. Market risk premium 6. How is cost of equity under Bond Yield Plus Risk Premium Approach computed? 7. How is weighted average cost of capital (WACC) computed?1. Explain the three varying characteristics of common shares. 2. What are flotation costs? 3. How is cost of common equity computed for no growth stock? for constant growth stock? 4.What is a dividend yield? 5. Define the following terms used in Capital Asset Pricing Model (CAPM) to compute for cost of equity: a. Risk-free rate b. Stock's Beta Coefficient C. Market risk premium 6. How is cost of equity under Bond Yield Plus Risk Premium Approach computed? 7. How is weighted average cost of capital (WACC) computed?