1. A stock has an expected return of 10 percent, its beta is 1.50, and the expected return on the market is 8 percent. What must the risk-free rate be?
2. Suppose a firm pays total dividends of $806,000 out of net income of $2.6 million. What would the firm’s payout ratio be? (Round your answer to 2 decimal places.)
3. It is January 2nd and senior management of Digby meets to determine their investment plan for the year. They decide to fully fund a plant and equipment purchase by issuing 75,000 shares of stock plus a new bond issue. Assume the stock can be issued at yesterday’s stock price ($33.55) and leverage changes to 2.8. Which of the following statements are true? Select all that apply.
- Total liabilities will be $123,713,264
- The total investment for Digby will be $206,542,591
- Total Assets will rise to $217,831,113
- Working capital will remain the same at $10,349,434
- Equity will be $80,313,076
- Digby will issue stock totaling $2,516,250