A firm has current assets that could be sold for their book value of $10 million

Question

A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $95 million today. The form has total debt at a book value of $40 million, but interest rate increased the value of the debt to a current market value of $50 million. This firm's market-to-book ratio is 1.83 1.50 1.35 1.46 Suppose that in 2012 the expected dividends of the stocks in a board market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%, Using the constant growth formula for valuation, if interest rates increase rates increase to 9%, the value of the market will change by_. -10% -20% -25% -33% Gagliardi way Corporation has an expected ROE of 15%. If it pays out 30% of its earning as dividends, its dividend growth rate will be_. 4.5% 10.5% 15% 30%

Explanation / Answer

Answer 1 : Answer 'A' is correct. that is 1.83.

Answer 2 : Answer 'D' is correct. that is -33%

Answer 3: Answer 'B' is correct. that is 10.5%

Answer 1 Book Value of the Firm (Million) Current Assets 10 Fixed Assets 60 Total Assets 70 Less Debt 40 Book Value 30 Market Value of the Firm (Million) Current Assets 10 Fixed Assets 95 Total Assets 105 Less Debt 50 Book Value 55 Market to Book Ratio = Market value/book value = 55/30 =1.83 Answer 2 Valuation of stocks P0= D(1+g)/r-g Present value = 240(1.06)/(0.08-0.06) =12720 New Value = 240(1.06)/(0.09-0.06) = 8480 Value of market change = 8480-12720/12720*100 = -33% Answer 3 Dividend growth rate = ROE * (1-p) = 15% * (1-30%) = 10.5%

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