Finace

1. Financial Market is expecting a period of intense growth and has decided to retain more of its earnings to help finance that growth. As a result, it is going to reduce its annual dividend by thirty percent a year for the next seven years. After that, it will maintain a constant dividend. The pay out ratio is 32.5% and the company’s PE is 12. Last year, the company paid $3.60 as the annual dividend per share. You bought the stock at $34. a. What is the market value of this stock if the required rate of return is 14.5 percent? b. What are the dividends yields and capital gains yield today? Briefly discuss your findings. 2. A firm is considering Projects S and L, and X whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the NPV and/or IRR criterion, while the CFO favors the IRR method. You were hired to advise the firm on the best procedure. If the wrong decision criterion were used, how much potential value would the firm lose? Your required return is 6.00% Year 0 1 2 3 4 CFS -$1,025 $380 $380 $380 $380 CFL -$2,150 $765 $765 $765 $765 CFx -3,670 $568 $675 $1630 $1850 a. Calculate Payback, discounted payback, NPV, IRR and Profitability Index for each and briefly discuss your findings. b. Which project would you recommend is they are all mutually exclusive? c. If you had enough funding for all three independent projects which would you recommend and why? 3. Top Motors has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past three years was 15.00%, but investors expect the annual future stock market return to be 13.00%. a. What is the firm's required return? Discuss your findings. b. You have a portfolio of three securities with a beta of 1.05, what are the weights of the portfolio? c. What is the beta of a three-asset portfolio with an expected return of 11? 4....