Hey I was wondering, does anyone know the answers to these questions? 1) What is the most expensive way to pay for a merger 2) What are the average values for market risk premium? 3) Why cant the growth rate of a company be higher than the GDP of the country where the company is based? 4) How does a dividend increase affect free cash flows?
Thanks!
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Think about it, if g>GDP growth, you're saying the company is growing faster than GDP, which in the Gordon growth model would result in the company eventually becoming bigger than the country. Does that make sense? A good example to think about here is Under Armour right now. Yes the company is growing at a crazy pace, but is it really going to grow at 8% (or whatever high number you put in) forever? A reasonable fix for this is to add additional growth stages to your model (i.e. from Y5-Y10 FCFs will grow at 8%/year and then g=3% after that).
I urge you to think about this yourself.
Thanks! that makes perfect sense. As for #4, I shouldn't have asked it. I thought it out slowly and it is pretty simple.
Would it not be issuing equity?
FCF would not be effected because EBIT is FCF,? Correct
Yeah I believe it doesn't affect FCF.
And I believe that issuing stock is the most expensive way to pay for a merger. It should be cheaper than issuing debt. But I am not too sure about that.
Your last sentence contradicts itself. Read over it again.
Why would issuing stock be cheaper than issuing debt? Until a certain point in the capital structure, a company's cost of debt will be much cheaper than their cost of equity.
1 - stock 2 - 7% 3 - if it grows at that rate for infinity it will take over the entire economy 4 - will not effect Free Cash Flow (FCF = EBIT*(1-t) + Change in NWC + D&A - Capex), but will reduce ending cash balance
y was this so hard?
I mean cheaper than debt* sorry was typing on my iPad.
goto www.harvard.com and apply for an M.B.A. and you will find the answers you are seeking
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