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Least Likely | Most Likely |
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Most preferred | Least preferred |
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Statement 1: | The value of the tax shield provided by debt can be calculated by multiplying the pre-tax cost of debt by (1 – tax rate). |
Statement 2: | If a company is profitable, the value of its tax shield will be positive and its value will increase as its leverage increases, all else equal. |
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Cost of Capital | Share Price |
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Investment Strategy | Marketing Strategy |
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Drakar | O’Rourke |
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If the company follows a residual dividend policy, its payout ratio will be closest to:
Project A: $2,500,000 value; IRR of 11.50%
Project B: $1,000,000 value; IRR of 13.00%
Project C: $2,000,000 value; IRR of 9.50%
Project D: $500,000 value; IRR of 10.50%
Project E: $1,500,000 value; IRR of 8.00%
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Cash | 25,000,000 |
Share price | 40.00 |
Shares outstanding (prior to transaction) | 20,000,000 |
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Cash dividend | Share repurchase |
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Net Income (earnings) | $10 |
Free Cash Flow to Equity | $8 |
Dividends Paid | $1 |
Stock Repurchases | $3 |
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