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【正文】 ught about using the capitalasset pricing model in this regard. It has identified two samples of panies, with model value betas of for health foods and for specialty metals (Assume that the sample panies had similar capital structure to that of sproutsNSteel.). The riskfree rate is currently 12% and the expected return on the market portfolio 17%. Using the CAPM approach, what weighted average required returns on investment would you remend for these two divisions? Question 4 ? You are evaluating two independent projects as to their effect on the total risk and return of your corporation. The projects are expected to result in the following: ? Expected value of Standard deviation Present value of pany Of present value (in million) (in million) Existing projects only $6 $3 Plus project 1 Plus project 2 Plus project 1and 2 a. In which of the new projects (if any) would you invest? Explain. b. What would you do if a CAPM approach to the problem suggested a different decision? Question 5 ? Zapata Enterprises is financed by two sources of funds: bonds and mon stock. The cost of capital for funds provided by bonds is kj, and ke, is the cost of capital for equity funds. The capital structure consists of B dollars’ worth of bonds and S dollars’ worth of stock, where the amounts represent market values. Compute the overall weighted average of cost of capital, k0. Question 6 ? Assume that B (in problem) is $3m and S is $7m. The bonds have a 14% yield to maturity, and the stock is expected to pay $500000 in dividends this year. The growth rate of dividends has been 11% and is expected to continue at the same rate. Find the cost of capital if the corporation tax rate on ine is 40%. Question 7 ? KFar Stores has launched an expansion program that should result in the saturation of the Bay Area marketing region of California in 6 years. As a result, the pany is predicting a growth in earnings of 12% for three years and 6% for the fourth through sixth years, after which it expects constant earnings forever. The pany expects to increase its annual dividend per share, most recently $2, in keeping with this growth pattern. Currently, the market price of the stock is $25 per share. Estimate the pany’s cost of equity capital.
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