Question

please answer all 3!

QUESTION 16 In what sequence will firms were different source of new capital in the Packing Onder Hypothesis is true? Debt issue.Equity issue, Retained Earnings It is irrelevant since WACC is independent of capital structure Debt issue, Retained Earnings, Equity Equity issue, Debt issue, Recained Earnings. Retained Earnings, Debt Issue Equity Issue QUESTION 17 Which statement is correct? When a fim announces a seasoned equity offering markets generally interpret this as a positive signal that management believes the firm is undervalued. The stock price decreases as a result of this interpretation When a fim nonces a seasoned equity offering, markets generally interpret this as a positives that management beves the fum is undervalued. The stock price increases as a result of this interpretation When a firm announces a seasoned equity offering, markets generally interpret this as a negatives that management believes the form is overvalued. The stock price increases as a result of this interpretation When a firm announces a seasoned equity offering markets generally interpret this as a negative signal that management believes the firm is overvalued. The stock price drops as a result of this interpretation QUESTION 18 o Usted below are five different cash flow bundles. If your discount rate is 10 annual compounding with bundle has the greatest presentate? Alump sum payment of $25,000 at the end of 10 years. A perpetual stream of annual payments of 1,000 starting in one year. A perpetual stream of anal payments starting at 3500 in one year and increasing as per year thereafter The anal payments of $2.000. the first payment occurs one year from today Alumo sum payment of $10,000 today

Answer 1

16. Option E is correct. This is the order according to the pecking order hypothesis.

17. Option D is correct because this is seen as a negative sign and as a result the stock price decreases.

18. We calculate the PV of all the options.

PV = 25000/1.1^10 = 9638.58

PV = 1000/0.1 = 10000

PV = 500/(0.1 - 0.05) = 10000

PV = 2800x (1/1.1 + 1/1.1^2 + 1/1.1^3 + 1/1.1^4 + 1/1.1^5) = 10614

PV = 10000

Hence, option D is correct.