02 Jan b. What would happen to

Saint MBA570 Module 1 Discussion

Module 1 Discussion

This discussion question for this module has two parts. Respond to both parts to receive full credit for this assignment.

Part 1: What is a hostile takeover and what generally happens to the stock price of the firm being acquired in a hostile takeover?

Part 2: How does a hostile takeover affect the company’s stakeholders (shareholders, executives, employees, and society in general)? Is it usually beneficial or detrimental to these stakeholders? Why?

Include some news that is less than a year old that discusses an in-process or recently completed merger in your answer. Briefly discuss the main issues in that merger and whom the merger is likely to benefit or hurt.

The ProQuest database at the Saint Leo University Library website can be a useful tool for completing this assignment. Click here for instructions on accessing ProQuest.

Hint: One way to find merger news is to use the library’s database for the Wall Street Journal and search for a recent article with the word “merger” in the title of the article.

Saint MBA570 Module 2 Discussion

Module 2 Discussion

The Law of One Price states that equivalent investment opportunities trading in different competitive markets will have the same price. Yet, one can find examples where that rule seems to be violated. It is a well-known fact that Americans pay a much higher price for most prescription drugs than people in most other countries. Also, the price (when adjusted for exchange rates) for the same make and model of automobile varies greatly across different countries. Furthermore, the price of a barrel of crude oil varies between locations. For example, on October 12, 2012, the price for Brent crude oil produced in Europe was $114.21 and the price for West Texas Intermediate (WTI) crude oil produced in Texas was $91.86.

Do these three cases demonstrate that the Law of One Price is false? Why or why not?

Saint MBA570 Module 3 Discussion

Module 3 Discussion

Respond to all of the questions to receive full credit for this assignment.

The capital budgeting process is important, but is it the most important process that a firm undertakes. Why or why not? If you believe there is a more important process, what is it and why do you think it is more important?

Saint MBA570 Module 4 Discussion

Module 4 Discussion

This discussion question for this module has two parts. Please follow the directions carefully to receive full credit for this assignment.

Every year, Fortune magazine publishes a list of the “World’s Most Admired Companies” and Barron’s magazine publishes a list of the “World’s Most Respected Companies.” Choose one company from the top twenty on either of these lists from the most recent year available that you also admire or respect and one company that you admire or respect little.

Part 1: What criteria does the magazine use to evaluate companies for the list? Do you agree with these criteria? Why or why not?

Part 2: Why do you admire the company you chose as a favorite? Why do you not respect the company you chose as not admirable?

Both Barron’s and Fortune are available at the Saint Leo University Library website via the ProQuest database. Keep in mind that the most recent list available may be from last year.Click here for instructions on accessing ProQuest.

Saint MBA570 Module 5 Discussion

Module 5 Discussion

This discussion question for this module has two parts. Respond to both parts to receive full credit for this assignment.

Part 1: There is evidence that small stocks and value stocks perform better over the long term than the market averages. What are some logical reasons for this phenomenon?

Part 2: There is strong evidence that many investors suffer from familiarity bias and overconfidence bias. Can you explain why these biases might exist? Can you think of a situation in which you might make these mistakes (if you hadn’t learned about these biases in this module)?

Include some news that is less than a year old that is applicable to this discussion.

The ProQuest database at the Saint Leo University Library website can be a useful tool for completing this assignment. Click here for instructions on accessing ProQuest.

Saint MBA570 Module 6 Discussion

Module 6 Discussion

This discussion question has two parts. Respond to both parts to receive full credit for this assignment.

Part 1: Your friend is asking for advice. She is planning to retire in 40 years and wants to know what investments she should choose. She also wants to know if she should use an IRA or 401k or some other sort of retirement vehicle. Please advise her.

Part 2: You have another friend that already has a sizable amount saved for his retirement, but he wants to retire in 10 years. What type of advice would you give him about what type of investment to make and as to whether or not to use a retirement plan?

Include some news or advice from an article that is less than a year old that is applicable to this discussion.

The ProQuest database at the Saint Leo University Library website can be a useful tool for completing this assignment. Click here for instructions on accessing ProQuest.

Saint MBA570 Module 7 Discussion

Module 7 Discussion

This discussion question has two parts. Use Figure 15.7 in your textbook which shows the net debt-to-enterprise value ratio for some select industries to answer both parts of the question. Respond to both parts to receive full credit for this assignment.

Part 1: Firms in the real estate investment trusts (REITs), airlines, electric utilities, and paper products industries tend to have high leverage. Explain why firms in these industries would prefer to have high leverage.

Part 2: Firms in the computer hardware, footwear, apparel and luxury goods, and data processing industries tend to have low leverage. Explain why firms in these industries would prefer to have low leverage.

Include some news from an article that is less than a year old that is applicable to this discussion.

The ProQuest database at the Saint Leo University Library website can be a useful tool for completing this assignment. Click here for instructions on accessing ProQuest.

Saint MBA570 Module 8 Discussion

Module 8 Discussion

This discussion question has two parts. Respond to both parts to receive full credit for this assignment.

Part 1: Why do firms choose to make large increases in their dividends or start a stock repurchase program? Why would they choose one of these payout methods over another?

Part 2: Why do firms choose to cut or eliminate their dividends? What usually happens to the stock price of a company that does this?

Include some news or advice from an article that is less than a year old that is applicable to this discussion.

The ProQuest database at the Saint Leo University Library website can be a useful tool for completing this assignment. Click here for instructions on accessing ProQuest.

Saint MBA570 Module 3 Writing Assignment 1
MBA 570

Writing Assignment 1 Instructions and Rubric

Instructions

The first writing assignment is due at the end of Module 3. You are advised to begin working on the first writing assignment during Module 1.

This writing assignment should be in an essay format. It should use two or more published news or academic articles which are less than a year old as cited references. In your essay, you should answer the following questions:

• What are value stocks?

• What are growth stocks?

• What is the reasoning that investors use for purchasing value or growth stocks?

• Has value or growth investing worked best over the long term?

• Do you prefer one of these investment methods? Justify your response.

• Find recent examples of news articles in which someone is described as a value or growth investor. How successful have they been with this method?

The essay will be in APA format and be 500-1,000 words in length (this range includes everything in the assignment including your name, title, and citations). Turnitin.com software will be used to ensure that submitted assignments are original works. See the rubric on the next page for complete grading criteria.

The ProQuest database at the Saint Leo University Library website can be a useful tool for completing this assignment. Click here for instructions on accessing ProQuest.

Hint: One way to find information for this assignment is to use the library’s database for the Wall Street Journal or Barron’s and search for a recent article with the words “value investor” or “growth investor” in the text of the article.

Saint MBA570 Module 6 Writing Assignment 2
MBA 570

Writing Assignment 2 Instructions and Rubric

Instructions

The second writing assignment is due at the end of Module 6. You are advised to begin working on the second writing assignment during Module 4.

This writing assignment should be in an essay format. It should use two or more published news or academic articles which are less than a year old as cited references. This writing assignment addresses the values learning outcome (LO7) as detailed in the syllabus.

For this assignment, assume that you are a corporate manager that needs to make an important decision. Your company currently has its largest factory (700 employees) located in the Midwestern United States. This factory is currently not competitive in international markets and its poor results are threatening to force the entire company into bankruptcy. The company employs 3,000 in other areas of the U.S.

You have to decide whether to keep the factory where it is or move it to Canada or Ireland. You can only keep one factory open. The corporate tax rates of Canada (20%) and Ireland (15%) are much lower than the U.S. (35%). Labor costs will not change significantly because the cost of training new employees will be offset by the replacement of highly paid senior employees with younger employees in the other countries. The old factory needs extensive renovation which will still not leave it as efficient as the new factories planned for the new countries. Therefore, the NPV of the capital investments involved are equal for all three countries.

You have calculated the NPV of each choice. The NPV of keeping the U.S. factory open is $1,000,000. The NPV of moving the factory to Canada or Ireland is $10,000,000 and $35,000,000 respectively.

In this writing assignment, you should answer the following questions:

• Where should your factory be located? Why?

• Who are the stakeholders in this decision? How did you take the stakeholders into account when making your decision?

• How does your decision support responsible stewardship and integrity in the context of financial management?

The essay will be in APA format and be 500-1,000 words in length (this range includes everything in the assignment including your name, title, and citations). Turnitin.com software will be used to ensure that submitted assignments are original works. See the rubric on the next page for complete grading criteria.

Recent published news or academic articles are available in the ProQuest database at the Saint Leo University Library website. Click here for instructions on accessing ProQuest.

Saint MBA570 Module 1 Homework

Q 1.

You are a shareholder in a C corporation. The corporation earns $ 1.72$1.72 per share before taxes. Once it has paid? taxes, it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 35 %35%?, and your personal tax rate on? (both dividend and? non-dividend) income is 30 %30%. How much is left for you after all taxes are? paid?

Q 2

You are a shareholder in an S corporation. The corporation earns $ 2.06$2.06 per share before taxes. As a pass through? entity, you will receive $ 2.06$2.06 for each share that you own. Your marginal tax rate is 30 %30%. How much per share is left for you after all taxes are? paid?

Q 3

You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too?high, but you will be the CEO of the?combined, much larger company. You know that when the company gets?bigger, your pay and prestige will increase. What is the nature of the agency conflict here and how is it related to ethical?considerations?

Q 4

What four financial statements can be found in a? firm’s 10-K? filing? What checks are there on the accuracy of these? statements?

What four financial statements can be found in a? firm’s 10-K? filing? ? (Select the best choice? below.)

A.

Balance? sheet, income? statement, statement of cash? flows, and Statement of income and expenses

B.

Balance? sheet, cash? budget, earnings? statement, and statement of? stockholders’ equity

C.

Balance? sheet, income? statement, statement of cash? flows, and statement of? stockholders’ equity

D.Balance? sheet, asset and liability? statement, statement of cash? flows, and statement of? stockholders’ equity

What checks are there on the accuracy of these? statements? ? (Select the best choice? below.)

A.Financial statements in form? 10-K are required to be audited by a neutral third? party, who checks them and ensures that the financial statements are prepared according to GAAP and that the information contained is reliable.

B. The accuracy of the? firm’s financial statements is certified by the? firm’s board of? directors, which is the only required check.

C.It is up to each investor to certify the accuracy of the financial statements.

D.Financial statements are always sufficiently accurate so no checks are needed.

Q 5

Consider a project that requires an initial investment of $ 100 comma 000$100,000 and will produce a single cash flow of $ 153 comma 000$153,000 in 44 years.

a. What is the NPV of this project if the 44?-year interest rate is 5.1 %5.1% ?(EAR)?

b. What is the NPV of this project if the 44?-year interest rate is 9.9 %9.9% ?(EAR)?

c. What is the highest 44?-year interest rate such that this project is still? profitable?

Q 6

?CBS’s five-year borrowing rate is 1.73 %1.73% and JPMorgan? Chases’ is 2.83 %2.83%. Which would you? prefer? $ 500$500 from CBS paid today or a promise that the firm will pay you $ 550$550 in five? years? Which would you choose if JPMorgan Chase offered you the same? alternative?

You would? prefer: ?(Select the best choice? below.)

A.

$ 550$550 from JPMorgan Chase 55 years and $ 500$500 from CBS today.

B.

$ 550$550 from JPMorgan Chase 55 years and $ 550$550 from CBS in 55 years.

C.

$ 500$500 from JPMorgan Chase today and $ 500$500 from CBS today.

D.

$ 500$500 from JPMorgan Chase today and $ 550$550 from CBS in 55 years.

Q 7

Your best taxable investment opportunity has an EAR of 6.3 %6.3%. Your best? tax-free investment opportunity has an EAR of 2.7 %2.7%. If your tax rate is 25 %25%?, which opportunity provides the higher? after-tax interest? rate?

Q 8

Consider the price paths of the following two stocks over six time? periods:

1

2

3

4

5

6

Stock 1

$ 7$7

$ 9$9

$ 11$11

$ 9$9

$ 10$10

$ 13$13

Stock 2

$ 14$14

$ 10$10

$ 7$7

$ 15$15

$ 14$14

$ 17$17

Neither stock pays dividends. Assume you are an investor with the disposition effect and you bought at time 1 and right now it is time 3. Assume throughout this question that you do no trading? (other than what is? specified) in these stocks.

a. Which? stock(s) would you be inclined to? sell? Which would you be inclined to hold? onto?

b. How would your answer change if right now is time? 6?

c. What if you bought at time 3 instead of 1 and today is time? 6?

d. What if you bought at time 3 instead of 1 and today is time? 5?

Q 9

Each of the six firms in the table below is expected to pay the listed dividend payment every year in perpetuity.

Firm

Dividend? ($ million)

Cost of Capital? (%/year)

S1

10.210.2

8.38.3

S2

10.210.2

12.412.4

S3

10.210.2

14.814.8

B1

102.0102.0

8.38.3

B2

102.0102.0

12.412.4

B3

102.0102.0

14.814.8

a.Using the cost of capital in the? table, calculate the market value of each firm.

b. Rank the three S firms by their market values and look at how their cost of capital is ordered. What would be the expected return for a? self-financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market? value? Repeat using the B firms.

c. Rank all six firms by their market values. How does this ranking order the cost of? capital? What would be the expected return for a? self-financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market? value?

d. Repeat part

?(c?)

but rank the firms by the dividend yield instead of the market value. What can you conclude about the dividend yield ranking compared to the market value? ranking?

Q 10

Consider the following? stocks, all of which will pay a liquidating dividend one year from now and nothing in the? interim:

Market Capitalization

?($ million)

Expected Liquidating Dividend? ($ million)

Beta

Stock A

807807

1 comma 0001,000

0.670.67

Stock B

801801

1 comma 0001,000

1.411.41

Stock C

898898

1 comma 0001,000

1.311.31

Stock D

888888

1 comma 0001,000

1.071.07

a.Calculate the expected return of each stock.

b. What is the correlation between the expected return and market capitalization of the? stocks?

Saint MBA570 Module 2 Homework

Q 1

Honda Motor Company is considering offering a $ 2 comma 200$2,200 rebate on its? minivan, lowering the? vehicle’s price from $ 28 comma 000$28,000 to $ 25 comma 800$25,800. The marketing group estimates that this rebate will increase sales over the next year from 49 comma 00049,000 to 67 comma 00067,000 vehicles. Suppose? Honda’s profit margin with the rebate is $ 6 comma 600$6,600 per vehicle. If the change in sales is the only consequence of this? decision, what are its benefits and? costs? Is it a good? idea?

Q 2

Suppose the current market price of corn is $ 3.64$3.64 per bushel. Your firm has a technology that can convert 1 bushel of corn to 3 gallons of ethanol. If the cost of conversion is $ 1.72$1.72 per? bushel, at what market price of ethanol does conversion become? attractive?

Q 3

Suppose the? risk-free interest rate is 3.6 %3.6%.

a. Having $ 500$500 today is equivalent to having what amount in one? year?

b. Having $ 500$500 in one year is equivalent to having what amount? today?

c. Which would you? prefer, $ 500$500 today or $ 500$500 in one? year? Does your answer depend on when you need the? money? Why or why? not?

A.$ 500$500 today

$ 500$500 in one year

Does your answer depend on when you need the? money? Why or why? not????(Select the best choice? below.)

A.Yes, because if you did need the money today it is more valuable than $ 500$500.

B.No, because if you did need it you could borrow the $ 500$500.

C.Yes, because if you? didn’t need? it, it’s not worth $ 500$500.

D.No, because if you? didn’t need it then the $ 500$500 can be invested and you could have more than $ 500$500 in one year.

Q 4

Your firm has a? risk-free investment opportunity with an initial investment of $ 162 comma 000$162,000 today and receipts of $ 178 comma 000$178,000 in one year. For what level of interest rates is this project? attractive?

Q 5

Your firm has identified three potential investment projects. The projects and their cash flows are shown? here:???(Click on the icon located on the? top-right corner of the data table below in order to copy its contents into a? spreadsheet.)

Project

Cash Flow Today

?(millions)

Cash Flow in One Year

?(millions)

A

negative $ 14?$14

$ 25$25

B

$ 6$6

$ 5$5

C $ 25$25

negative $ 8?$8

Suppose all cash flows are certain and the? risk-free interest rate is 11 %.

a. What is the NPV of each? project?

b. If the firm can choose only one of these? projects, which should it choose based on the NPV decision? rule?

c. If the firm can choose any two of these? projects, which should it choose based on the NPV decision? rule?

A.

Project Upper CC

Your answer is correct.

B.

Project Upper AA

C.

Project Upper BB

D.

Cannot tell

c. If the firm can choose any two of these projects, which should it choose based on the NPV decision rule???(Select the best choice below.)

A.Project

Upper CC

project Upper AA

B.Project

Upper CC

and project Upper BB

C.Project

Upper AA

project Upper BB

D.Cannot tell

Q 6

What is the present value of $ 3 , 000$3,000 received

a. 1414 years from today when the interest rate is 8 % per? year?

b. 2828 years from today when the interest rate is 16 % per? year?

c. 77 years from today when the interest rate is 4 % per? year?

Q 7

Your daughter is currently 1212 years old. You anticipate that she will be going to college in 66 years. You would like to have $ 141 comma 000$141,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 5 %5% per? year, how much money do you need to put into the account today to ensure that you will have $ 141 comma 000$141,000 in 66 ?years?

Q 8

Suppose you receive $ 160$160 at the end of each year for the next three years.

a. If the interest rate is 6 %6%?, what is the present value of these cash? flows?

b. What is the future value in three years of the present value you computed in ?(a?)?

c. Suppose you deposit the cash flows in a bank account that pays 6 %6% interest per year. What is the balance in the account at the end of each of the next three years? (after your deposit is? made)? How does the final bank balance compare with your answer in ?(b?)?

Q 9

You have just received a windfall from an investment you made in a? friend’s business. He will be paying you $ 49 comma 287$49,287 at the end of this? year, $ 98 comma 574$98,574 at the end of the following? year, and $ 147 comma 861$147,861 at the end of the year after that? (three years from? today). The interest rate is 14.8 .8% per year.

a. What is the present value of your? windfall?

b. What is the future value of your windfall in three years? (on the date of the last? payment)?

Q 10

You have just turned 30 years? old, have just received your? MBA, and have accepted your first job. Now you must decide how much money to put into your retirement plan. The plan works as? follows: Every dollar in the plan earns 9 %9% per year. You cannot make withdrawals until you retire on your 60 th60th birthday. After that? point, you can make withdrawals as you see fit. You decide that you will plan to live to 100 and work until you turn 6060. You estimate that to live comfortably in? retirement, you will need $ 93 comma 000$93,000 per year starting at the end of the first year of retirement and ending on your one hundredth birthday. You will contribute the same amount to the plan at the end of every year that you work. How much do you need to contribute each year to fund your? retirement?

Saint MBA570 Module 4 Homework

Q 1

A 1010?-year bond with a face value of $ 1 comma 000$1,000 has a coupon rate of 7.50 %7.50%?, with semiannual payments.??

a. What is the coupon payment for this? bond?

b. Enter the cash flows for the bond on a timeline.

Q 2

The following table summarizes prices of various? default-free zero-coupon bonds? ($100 face? value):

Maturity? (years)

1

2

3

4

5

Price? (per $100 face? value)

?$96.8596.85

?$92.4192.41

?$87.9087.90

?$83.2883.28

?$78.1578.15

a. Compute the yield to maturity for each bond.

b.Plot the? zero-coupon yield curve? (for the first five? years).

c.Is the yield curve upward? sloping, downward? sloping, or? flat?

Q 3

Suppose a 1010?-year, $ 1 comma 000$1,000 bond with a 7 %7% coupon rate and semiannual coupons is trading for a price of $ 1 comma 152.66$1,152.66.

a. What is the? bond’s yield to maturity? (expressed as an APR with semiannual? compounding)?

b. If the? bond’s yield to maturity changes to 8 %8% ?APR, what will the? bond’s price? be?

Q 4

Assume the? zero-coupon yields on? default-free securities are as summarized in the following? table:

Maturity

1 year

2 years

3 years

4 years

5 years

?Zero-Coupon Yields

3.603.60?%

4.204.20?%

4.504.50?%

4.804.80?%

4.904.90?%

What is the price of a? three-year, default-free security with a face value of

$ 1 comma 000$1,000

and an annual coupon rate of

6 %6%??

What is the yield to maturity for this? bond?

Q 5

The following table summarizes yields to maturity on several? 1-year, zero-coupon? securities:

Security

Yield

Treasury

2.9302.930?%

AAA Corporate

3.5063.506?%

BBB Corporate

4.0984.098?%

B Corporate

4.7714.771?%

a.What is the price? (expressed as a percentage of the face? value) of a? 1-year, zero-coupon corporate bond with a? AAA-rating and a face value of

$ 1 comma 000$1,000??

b. What is the credit spread on? AAA-rated corporate? bonds???

c. What is the credit spread on? B-rated corporate? bonds?

d.??How does the credit spread change with the bond? rating? Why?

Q 6

Anle Corporation has a current price of $ 12$12?, is expected to pay a dividend of $ 1$1 in one? year, and its expected price right after paying that dividend is $ 30$30.

a. What is? Anle’s expected dividend? yield?

b. What is? Anle’s expected capital gain? rate?

c. What is? Anle’s equity cost of? capital?

Q 7

Summit Systems will pay a dividend of $ 1.63$1.63 one year from now. If you expect? Summit’s dividend to grow by 5.3 %5.3% per? year, what is its price per share if its equity cost of capital is 11.9 .9%??

Q 8

Heavy Metal Corporation is expected to generate the following free cash flows over the next five? years:

Year

1

2

3

4

5

FCF? ($ million)

51.251.2

69.669.6

78.578.5

75.675.6

83.483.4

After? that, the free cash flows are expected to grow at the industry average of

4.4 %4.4%

per year. Using the discounted free cash flow model and a weighted average cost of capital of

13.5 .5%?:

a. Estimate the enterprise value of Heavy Metal.

b. If Heavy Metal has no excess? cash, debt of

$ 303$303

?million, and

4242

million shares? outstanding, estimate its share price.

Q 9

You read in the paper that Summit Systems will pay a dividend of $ 1.00$1.00 this year. At that point you expected? Summit’s dividend to grow by 7.0 %7.0% per year. Today you read in the paper that Summit Systems has revised its growth prospects and expects its dividends to grow at a rate of 3.0 %3.0% per year forever. If the? firm’s equity cost of capital is 11.0 .0%?:

a. What is the value of a share of Summit Systems stock based on the original expected dividend growth of 7.0 %7.0% per? year?

b. If you tried to sell your Summit Systems stock after reading this? news, what price would you be likely to? get? Why?

Q 10

Assume that Cola Co. has a share price of $ 43.13$43.13. The firm will pay a dividend of $ 1.15$1.15 in one? year, and you expect Cola Co. to raise this dividend by approximately 6.2 %6.2% per year in perpetuity.

a. If Cola? Co’s equity cost of capital is 8.1 %8.1%?, what share price would you expect based on your estimate of the dividend growth? rate?

b. Given Cola? Co’s share? price, what would you conclude about your assessment of Cola? Co’s future dividend? growth?

Saint MBA570 Module 7 Homework

Q 1

Consider a project with free cash flows in one year of $ 148 comma 993$148,993 or $ 186 comma 716$186,716?, with each outcome being equally likely. The initial investment required for the project is $ 94 comma 284$94,284?, and the? project’s cost of capital is 19 %. The? risk-free interest rate is 5 %5%.

a. What is the NPV of this? project?

b. Suppose that to raise the funds for the initial? investment, the project is sold to investors as an? all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this waylong dash—that ?is, what is the initial market value of the unlevered? equity???

c. Suppose the initial $ 94 comma 284$94,284 is instead raised by borrowing at the? risk-free interest rate. What are the cash flows of the levered? equity, what is its initial value and what is the initial equity according to? MM?

Q 2

Acort Industries owns assets that will have? a(n) 80 %80% probability of having a market value of $ 54$54 million one year from now. There is a 20 %20% chance that the assets will be worth only $ 24$24 million. The current? risk-free rate is 4 %4%?, and? Acort’s assets have a cost of capital of 8 %8%.

a. If Acort is? unlevered, what is the current market value of its? equity?

b. Suppose instead that Acort has debt with a face value of $ 20$20 million due in one year. According to? MM, what is the value of? Acort’s equity in this? case?

c. What is the expected return of? Acort’s equity without? leverage? What is the expected return of? Acort’s equity with? leverage?

d. What is the lowest possible realized return of? Acort’s equity with and without? leverage?

Q 3

Suppose The Washington Post Company? (WPO) has no debt and an equity cost of capital of 9.4 %9.4%. The average? debt-to-value ratio for the software industry is 12.8 .8%. What would its cost of equity be if it took on the average amount of debt for its industry at a cost of debt of 6.2 %6.2%??

Q 4

Hubbard Industries is an? all-equity firm whose shares have an expected return of 10.9 .9%. Hubbard does a leveraged? recapitalization, issuing debt and repurchasing? stock, until its? debt-equity ratio is 0.670.67. Due to the increased? risk, shareholders now expect a return of 17.1 .1%. Assuming there are no taxes and? Hubbard’s debt is? risk-free, what is the interest rate on the? debt?

Q 5

Arnell Industries has just issued $ 15$15 million in debt? (at par). The firm will pay interest only on this debt.? Arnell’s marginal tax rate is expected to be 40 %40% for the foreseeable future.

a. Suppose Arnell pays interest of 9 %9% per year on its debt. What is its annual interest tax? shield?

b. What is the present value of the interest tax? shield, assuming its risk is the same as the? loan?

c. Suppose instead that the interest rate on the debt is 7 %7%. What is the present value of the interest tax shield in this? case?

Q 6

Rogot Instruments makes fine violins and cellos. It has $ 1.5$1.5 million in debt? outstanding, equity valued at $ 2.1$2.1 million and pays corporate income tax at rate 38 %38%. Its cost of equity is 14 % and its cost of debt is 8 %8%.

a. What is? Rogot’s pretax? WACC?

b. What is? Rogot’s (effective? after-tax) WACC?

Q 7

Rumolt Motors has 6565 million shares outstanding with a share price of $ 39$39 per share. In? addition, Rumolt has issued bonds with a total current market value of $ 2 comma 068$2,068 million. Suppose? Rumolt’s equity cost of capital is 15 %?, and its debt cost of capital is 9 %9%.

a. What is? Rumolt’s pretax weighted average cost of? capital?

b. If? Rumolt’s corporate tax rate is 40 %40%?, what is its? after-tax weighted average cost of? capital?

Q 8

Milton Industries expects free cash flow of $ 2$2 million each year. ? Milton’s corporate tax rate is 38 %38%?, and its unlevered cost of capital is 11 %. Milton also has outstanding debt of $ 9.97$9.97 ?million, and it expects to maintain this level of debt permanently.

a. What is the value of Milton Industries without? leverage?

b. What is the value of Milton Industries with? leverage?

Q 9

Markum Enterprises is considering permanently adding an additional $ 74$74 million of debt to its capital structure. ? Markum’s corporate tax rate is 38 %38%.

a. Absent personal? taxes, what is the value of the interest tax shield from the new? debt?

b. If investors pay a tax rate of 35 %35% on interest? income, and a tax rate of 30 %30% on income from dividends and capital? gains, what is the value of the interest tax shield from the new? debt?

Q 10

With its current? leverage, Impi Corporation will have net income next year of $ 6$6 million. If? Impi’s corporate tax rate is 38 %38%?, and it pays 7 %7% interest on its? debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next? year?

Saint MBA570 Module 8 Homework

Q 1

Gladstone Corporation is about to launch a new product. Depending on the success of the new? product, Gladstone may have one of four values next? year: $ 153$153 ?million, $ 136$136 ?million, $ 92$92 ?million, and $ 75$75 million. These outcomes are all equally? likely, and this risk is diversifiable. Gladstone will not make any payouts to investors during the year. Suppose the? risk-free interest rate is 5 %5% and assume perfect capital markets.

a. What is the initial value of? Gladstone’s equity without? leverage?

Now suppose Gladstone has? zero-coupon debt with a $ 100$100 million face value due next year.

b. What is the initial value of? Gladstone’s debt?

c. What is the? yield-to-maturity of the? debt? What is its expected? return?

d. What is the initial value of? Gladstone’s equity? What is? Gladstone’s total value with? leverage?

Q 2

Suppose Tefco Corp. has a value of $ 133$133 million if it continues to? operate, but has outstanding debt of $ 135$135 million that is now due. If the firm declares? bankruptcy, bankruptcy costs will equal $ 26$26 ?million, and the remaining $ 107$107 million will go to creditors. Instead of declaring? bankruptcy, management proposes to exchange the? firm’s debt for a fraction of its equity in a workout. What is the minimum fraction of the? firm’s equity that management would need to offer to creditors for the workout to be? successful?

Q 3

Kohwe Corporation plans to issue equity to raise $ 45$45 million to finance a new investment. After making the? investment, Kohwe expects to earn free cash flows of $ 11$11 million each year. Kohwe currently has 5 million shares? outstanding, and has no other assets or opportunities. Suppose the appropriate discount rate for? Kohwe’s future free cash flows is 6 %6%?, and the only capital market imperfections are corporate taxes and financial distress costs.

a. What is the NPV of? Kohwe’s investment?

b. What is? Kohwe’s share price? today?

Suppose Kohwe borrows the $ 45$45 million instead. The firm will pay interest only on this loan each? year, and maintain an outstanding balance of $ 45$45 million on the loan. Suppose that? Kohwe’s corporate tax rate is 30 %30%?, and expected free cash flows are still $ 11$11 million each year.

c. What is? Kohwe’s share price today if the investment is financed with? debt?

Now suppose that with? leverage, Kohwe’s expected free cash flows will decline to $ 10$10 million per year due to reduced sales and other financial distress costs. Assume that the appropriate discount rate for? Kohwe’s future free cash flows is still 6 %6%.

d. What is? Kohwe’s share price today given the financial distress costs of? leverage?

Q 4

Marpor Industries has no debt and expects to generate free cash flows of $ 15$15 million each year. Marpor believes that if it permanently increases its level of debt to $ 30$30 ?million, the risk of financial distress may cause it to lose some customers and receive less favorable terms from its suppliers. As a? result, Marpor’s expected free cash flows with debt will be only $ 14$14 million per year. Suppose? Marpor’s tax rate is 40 %40%?, the risk free rate is 6 %6%?, the expected return of the market is 14 %?, and the beta of? Marpor’s free cash flows is 1.31.3 ?(with or without? leverage).

a. Estimate? Marpor’s value without leverage.

b. Estimate? Marpor’s value with the new leverage.

Q 5

Zymase is a biotechnology startup firm. Researchers at Zymase must choose one of three different research strategies. The payoffs? (after-tax) and their likelihood for each strategy are shown below. The risk of each project is diversifiable.

Strategy

Probability

Payoff

?($ million)

A

?100%

9090

B

?50%

160160

?50%

0

C

?10%

370370

?90%

2020

a. Which project has the highest expected? payoff?

b. Suppose Zymase has debt of $ 30$30 million due at the time of the? project’s payoff. Which project has the highest expected payoff for equity? holders?

c. Suppose Zymase has debt of $ 120$120 million due at the time of the? project’s payoff. Which project has the highest expected payoff for equity? holders?

d. If management chooses the strategy that maximizes the payoff to equity? holders, what is the expected agency cost to the firm from having $ 30$30 million in debt? due? What is the expected agency cost to the firm from having $ 120$120 million in debt? due?

a. Which project has the highest expected? payoff?

The project with the highest expected payoff? is:???(Select the best choice? below.)

A.

Project A

Your answer is correct.B.

Project B

C.

Project C

b. Suppose Zymase has debt of $ 30$30 million due at the time of the? project’s payoff. Which project has the highest expected payoff for equity? holders?

If Zymase has debt of $ 30$30 million due at the time of the? project’s payoff, the project with the highest expected payoff for equity holders? is:???(Select the best choice? below.)

Q 6

RFC Corp. has announced a $ 0.82$0.82 dividend. If? RFC’s price last price? cum-dividend is $ 8.24$8.24?, what should its first? ex-dividend price be? (assuming perfect capital? markets)?

Q 7

EJH Company has a market capitalization of $ 2.7$2.7 billion and 5050 million shares outstanding. It plans to distribute $ 95$95 million through an open market repurchase. Assuming perfect capital? markets:

a. What will the price per share of EJH be right before the? repurchase?

b. How many shares will be? repurchased?

c. What will the price per share of EJH be right after the? repurchase?

Q 8

The HNH Corporation will pay a constant dividend of $ 2$2 per? share, per? year, in perpetuity. Assume all investors pay a 25 %25% tax on dividends and that there is no capital gains tax. Suppose the other investments with equivalent risk to HNH stock offer an? after-tax return of 12 %.

a. What is the price of a share of HNH? stock?

b. Assume that management makes a surprise announcement that HNH will no longer pay dividends but will use the cash to repurchase stock instead. What is the price of a share of HNH stock? now?

Q 9

Assume capital markets are perfect. Kay Industries currently has $ 125$125 million invested in? short-term Treasury securities paying 6 % comma6%, and it pays out the interest payments on these securities each year as a dividend. The board is considering selling the Treasury securities and paying out the proceeds as a? one-time dividend payment. Assume that Kay must pay a corporate tax rate of 40 %40%?, and investors pay no taxes.

a. If the board went ahead with this? plan, what would happen to the value of Kay Industries upon the announcement of a change in? policy?

b. What would happen to the value of Kay Industries on the? ex-dividend date of the? one-time dividend?

c. Given these price? reactions, will this decision benefit? investors?

Q 10

Suppose the stock of Host Hotels? & Resorts is currently trading for $ 25$25 per share.

a. If Host issued a 20 %20% stock? dividend, what will its new share price? be?

b. If Host does a 3? : 2 stock? split, what will its new share price? be?

c. If Host does a 1? : 3 reverse? split, what will its new share price? be?