(Solved) The LUV Company has 3 million shares of common stock outstanding

July 21, 2017UncategorizedBy classhelp24@gmail.com [email if you need fresh paper done]

The LUV Company has 3 million shares of common stock outstanding at a book value of $3 per share. The stock trades for $4.00 per share. It also has $3 million in face value of debt that trades at 80% of par. The company has no other important sources of financing (i.e, no bank debt or preferred stock.) What is its appropriate debt ratio (D/V) to use when calculating the WACC?

A. 8.3%

B. 16.7%

C. 20.0%

D. 21.1%

Open Door Corporation has $3 Million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5 and earnings per share of comparable firm 2 is $2. Comparable firm 1’s stock is trading for $50 and comparable firm 2’s stock is trading for $28. What is the estimated stock price of open door using the method of comparables?

A. $33.43

B. $36.00

C. $39.00

D. $40.00

Why are firm-specific risks no incorporated by the market in expected rates of return on stocks?

A. There is no method to quantify firm specific risks

B. Firm specific risks are assumed to be diversified away

C. Firm specific risks are compensated by risk free rate

D. Beta includes a component to compensate firm specific risk

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