What are the two types of risk that are measured by a levered beta?
Milano pizza club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt –
equity ratio of 40 percent and makes interest payments of $41,000 at the end of each year. The coast of the firm’s levered equity is 19 percent. Each store estimated the annual sales will be $1.3 million: annual coast of goods sold
will be $670,000: and annual general and administrative cost will be $405,000. These cash flows are expected to remain the same forever . The corporate tax rate is 40 percent.
Use the flow to equity approach to determine the value of the company’s equity.
What is the total value of the company?
Last month, central Virginia power company, which had been having trouble with cost overruns on a nuclear power plant that it had been building announced that it was “temporarily suspending dividend payments due to the cash flow crunch associated with its investment program. “ The company’s stock price dropped from $28.50 to $25 when this announcement was made. How would you interpret this change in the stock price? ( That is, what would you say caused it?)
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