1. One of the key issues in managing the finances of a firm is achieving the correct balance between debt and equity financing. In this course you learned of a theory that can be used to achieve this optimal capital structure. Explain the theory and discuss its importance.
2. A. carefully read what is being asked of you in this question! You initially bought stock in fools gold mining for $64 a share, and it has paid you a dividend of $1.75 per share during the year you have held it. The share is now worth $72 a share. What is the
a. The percentage of total return
b. The dividend yield
c. The capital gain
B. you also bought a bond for $950 1 year ago. You have received two coupons for $30 each. You can sell the bond today for $975. What is you total dollar return? (please segregate this into two component parts)
3. orphan basin enterprises (OBE) has 50 million shares outstanding which are currently trading for $80 per share. Current market rates are 14% ad t-bills are trading at 5%. OBE's shares have a beta of 1.15. IN addition, OBE has long term debt with a face value of $1 billion which matures in 15 years. The coupon rate is 9% and the bonds are priced to yield 7.9%. if OBE's tax rate is 40%, what is their after tax WACC?
4. what are the two major methods for determining the cost of equity? If dividends do not grow by a fixed percentage and we do not know he firm's beta, can we still determine the equity cost? What would be necessary?
5. suppose your firm is going to finance a new project 100% with retained earnings. Your boss claims that since the earnings are already being retained and that since no outside financing is required, the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk free? Why or why not?