Starting Right Corporation Case Solution Following assumptions regarding the case: • Although there are only three investment options (corporate bonds, preferred stock, and common stock), there is actually a fourth option: to not invest at all. • There are only two states of nature, either the market is favorable or unfavorable. • The minimum initial investment for any investment type is $30,000. When studying the options, we will use $30,000 as the principal amount. • To
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Developing Spreadsheets.” P8–9 Rate of return, standard deviation, and coefficient of variation Mike is searching for a stock to include in his current stock portfolio. He is interested in Hi-Tech, Inc.; he has been impressed with the company’s computer products and believes that Hi-Tech is an innovative market player. However, Mike realizes that any time you consider a technology stock, risk is a major concern. The rule he follows is to include only securities with a coefficient of variation of returns
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FIN 5312: CORPORATE FINANCE Spring Semester 2016, Module I Professor Megginson January 7, 2016 Questions for case 1: Flash Memory, Inc. 1. Assuming the company does not invest in the new product line, prepare forecasted income statements and balance sheets at year-end 2010, 2011, and 2012. Based on these forecasts, estimate Flash’s required external financing: in this case all required external financing takes the form of additional notes payable from its commercial bank, for the same
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interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. 3. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. MTG would incur flotation costs equal to 5% of the proceeds on a new issue. 4. MTG’s common stock is currently selling at $50 per share. Its last dividend (D0) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. MTG’s beta is 1.2; the yield
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Financial Statements" (1999-2010), "For a corporation, substitute “Dividends Paid” for “Withdrawals”. The stockholders equity in a corporation is calculated as follows: Common stock (recorded at par value) + Premium on common stock (issue price minus par value) + Preferred Stock (recorded at par value) + Premium
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Assignment ACC 206 1. Analysis of stockholders' equity 1. Preference stock (100 par value) issued during 20X6 = 580,000 – 500,000 = $80,000 Number of preference shares issued during 20X6 = Par value of preferred shares issued / Par value per share of preferred shares = 80,000 / 100 = 800 shares 2. Common stock (10 par value) sold in 20X6 = 2,350,000 – 1,750,000
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| | |Long-term debt (bonds, at par) |$10,000,000 | | | | |Preferred stock |2,000,000 | | | | |Common stock ($10 par) |10,000,000 | | | | |Retained earnings
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Kelly contributes $375,000 of personal assets in return for 15,000 shares of common stock, but he must raise another $125,000 in cash. There are two alternative plans for raising the additional cash: Plan A is to sell 3,750 shares of common stock to one or more investors for $125,000 cash. Plan B is to sell 1,250 shares of cumulative preferred stock to one or more investors for $125,000 cash (this preferred stock would have a $100 par value, an annual 8% dividend rate, and be issued at par).
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other things held constant, tends to encourage the use of debt financing by corporations. 2. According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio. 3. The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited
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= 7.75% 2. A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. What is the cost of the preferred stock? Cost of preferred = 10/(100-2) = 10.2% 3. A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. What is the estimated cost of common stock equity (retained earnings)? Cost of RE = 6
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