1.Company ABC has issued both bonds and common equity in capitalmarket. A bad news hits Company ABC and leads to price of bondsissued by ABC to decline sharply. Will this news also affect thecost of common equity (without floatation cost)? Why or whynot?
2.Company CDE’s common stock is currently traded at $40 a share.It is expected to distribute a dividend of $2 a share next year.The average yield to maturity of bonds issued by CDE is 8%. Assumethat the CDE’s common stock has a risk premium of 4% relative toits yields. What is the implied growth rate of dividends expectedby market investors?
3.
Company ABC has a beta of 1.5 while Company BCD has a beta of0.9. When stock market risk premium (average stock market returnminus risk-free interest rate) increases, which company will seetheir share price rise more than the other?
1.Company ABC has issued both bonds and common equity in capital market. A bad news hits Company ABC and leads to price
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