An individual investor uses homemade leverage to artificially change a company's leverage.
An individual investing in a non-leverage business can replicate the leverage impact
using homemade leverage, which involves taking out personal loans on the investment.
Hence, an investor can use Homemade Leverage to create a portfolio that behaves as if a stock went through a capital restructuring. Therefore option C is correct.
to create a portfolio that behaves as if a stock which the investor owns went through...
Problem #1 Homemade Leverage Mr. Green owns 250 shares of ABC Company. There are 12,500 shares of stock outstanding. The stock sells for $42 per share. The company is financed by 70% equity and 30% debt at 5.5% interest. Mr. Green can borrow at the same interest rate as the company. The company expects to earn $66,675 annually. Ignore taxes. Mr. Green is not pleased with the level of debt carried by the company, so he is planning to sell...
Please answer all 3, thank you 1. An investor owns the following portfolio today Stock # of Shares Market value Expected annual return IBM 100 $141.23 7% STO $16.60 13% 220 $33.48 8% What is the investor's expected rate of return after one year? 2. IMF manages a $30 billion portfolio with an expected return equal to 15% and standard deviation equal to 22%. The risk-free rate equals 5%. One of the clients desires a portfolio standard deviation equal to...
Companies with stock shares that present a higher risk to shareholders in their investment portfolio typically offer a expected return on the stock and have a weighted average cost of capital. Select one: a. lower; lower b. higher, higher c. lower, higher d. higher; lower
Debt-free, Inc., an unlevered firm, is planning to use debt in its capital structure. The firm currently has 5,000 shares outstanding trading at $60 per share. The firm plans to sell 150 6% annual-coupon, 10-year bonds at their face values of $1,000 each and use the proceeds to repurchase some of its shares. When the bonds mature, Debt-free, Inc. plans to reissue new bonds to pay off the principal and to “roll over” its debt this way indefinitely. Assume the...
Does random diversification increase or decrease the variance of a portfolio? What role do events play in the actual return of a portfolio? Is this statement true – “if the event is expected, it is already reflected in the stock price”? Explain. What risk can be diversified away? Beta measures what form of risk? If you have a three stock portfolio and all three stock have betas of 2.0 or more what is the beta of the portfolio? Less than...
John invested in North Point stock when the firm was unlevered. After that, North Point has changed its capital structure. The firm now has a debt ratio of.35. To unlever his position, John has to Multiple Choice o borrow some money and purchase additional shares of North Point stock borrow some m o C ) maintain his current equity position as the debt of the firm does not affect him personally o sell 35 percent of his shares of North...
Wd X The weighted Average Cost of Capital: WACC - Wexlegurity . Wp X preferred stock Debt (1-1.). The below is true about the WACC calculation EXCEPT Select one: a. The cost of debt (Deb) is multiplied by (1 - TC) because interest expense is tax- deductible O b. The market values of equity & debt (and not the book values) are used in determining the weights of equity (we) & debt (wo). O cIt incorporates the cost of equity...
Just Answers Need ASAP Question 41 You want to create a $65,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 14.2 percent and Stock B has an expected return of 17.8 percent. You want to own $20,000 of Stock B. The risk-free rate is 4.8 percent and the expected return on the market is 13.1 percent. If you want the portfolio to have an expected return equal to that of the market,...
ANSWER CHOICE ONLY. please answer all 5 questions. pleaseee. 1.)Which of the following cash flows should NOT be included when calculating the NPV of the decision to made today to produce a new car model? a.expenditure on new plant and equipment needed for the new model b.The reduction in the sales of the company's existing product model due to the of the new product line c. Changes in net working capital. d. The taxas owed from selling for more than...
HAPPY stock returns have a covariance with the market portfolio of 0.036. The standard deviation of the returns on the market portfolio is 20%, and the expected market risk premium is 7.5%. The company has bonds outstanding total market value of $35 million. The bond is 10% annual coupon with one-year maturity and sold each at 101.852% of the face value of $1000. The company also has 6 million shares of common stock outstanding, each selling for $20. The corporate...