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which financial product has the most predictable income?
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- AAA Company is financed entirely by common stock that is priced to offer a 15 percent expected return. The common stock price is USD 40 per share. The earnings per share (EPS) is expected to be USD 6. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected value of earnings per share after refinancing? (Ignore taxes.)
- Which of the following statements is CORRECT?a. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.b. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock.c. Higher flotation costs reduce investor returns, and that leads to a reduction in a company's WACC.d. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.e. If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence needs to issue new stock.
- The interest rate charged per period multiplied by the number of periods per year is called theA) effective annual rate.B) compound interest rate.C) periodic interest rate.D) annual percentage rate.E) daily interest rate.