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6 Jul 2019

16. The covariance between Van Gough’s common stock returns and the return on the market portfolio is 0.008. The variance of the market 0.02. Which of the following comes closest to the beta of Van Gough’s common stock?

A. 0.6

B. 0.4

C. 0.1

D. 0.2

17. According to the M&M tax model, the value of a levered firm is equal to the value of an unlevered firm plus the tax shield from debt. What does this model imply about the firm’s optimal capital structure?

A.

0 % debt
B.

25% debt
C.

100% debt
D.

50% debt

18. Northern Wood Products is currently an all-equity firm with 16,000 shares of stock outstanding and a total market value of $352,000. Management is considering raising additional $88,000 either by issuing additional 1000 common stocks at $88 each, or by issuing 88 bonds with a 6 percent coupon rate and $1000 face value. If the firm is expected to have EBIT of $26,000,

what will the earnings per share be if they issue additional stock? Assume tax rate of 50%.

A.

0.76
B.

0.36
C.

0.65
D.

0.48

PLEASE ANSWER ALL QUESTIONS

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Casey Durgan
Casey DurganLv2
6 Jul 2019

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QUESTION 1

BMC Inc. currently has $1,000,000 of 8% coupon bonds and 40,000 common shares outstanding. The tax rate is 40%. The firm is considering a large investment of $1,500,000 in a new project. The following options are feasible for raising this capital:  Option 1: Sell $1,500,000 worth of common stock at $50 per share.  Option 2: Issue $1,000,000 worth of 6% coupon bonds with a 20-year maturity, in addition to $500,000 worth of common stock at $50 per share.

a) Calculate the EBIT indifference point for the 2 options.

b) What is the EPS at the EBIT indifference point? At EBIT levels above the EBIT indifference point, which plan is better?

QUESTION 2

B&B Inc. has a book value of debt of $500,000. The market value of debt is $550,000. Its pre-tax cost of debt is 10%, and its beta is equal to 2. The tax rate is 40%. The firm has an annual EBIT of $200,000. In the market, you observe that T-bills are being sold to yield 1%, and the S&P/TSX Composite Index is expected to yield 6%.

What is B&B’s weighted average cost of capital? Assume there is no cost of financial distress.

QUESTION 3

An unlevered firm, CEA Inc., has 160,000 common shares issued and outstanding. It has a perpetual constant EBIT of $800,000 and an unlevered beta of 1.5. The firm has corporate tax rate of 40%. The market risk premium is 8% and the risk- free rate is 3%. Assume a world of taxes and costs of financial distress.

a) Calculate the value of the firm.

b) Calculate the WACC for the firm.

c) What is the value of a share in the company and what is the EPS?

d) If the firm issues $1,000,000 of bonds with a coupon rate of 10%, and now the beta of the levered firm is 1.85, what is the value of the firm?

e) What is the WACC for the firm with its new capital structure?

SFE Inc. has 1 million shares of common stock outstanding at a book value of $40 per share. The stock trades for $50 per share. It also has $10 million in face value of debt (corporate bonds of 5 years with coupon rate 10.4%, paid semi-annually) that trades at 110% of face value. The company’s common stock has abeta of 1.2. Treasury bills yield 2% and the market return is 10%. The corporate tax rate is 35%.

a) What is the total market value of equity?

b) What is the total market value of debt?

c) What is its ratio of debt to total firm value in the market-value driven capital structure?

d) What is the (annualized) before-tax cost of debt?

e) What is the after-tax cost of debt?

f) What’s the cost of equity?

g) What’s the after-tax WACC?

h) SFE is considering a project that costs $500,000 today. The project returns$150,000 each year, for the next five years. What is the NPV of the project?

Really need help !!!!


2. You are given the following information concerning Around Town Tours:

· Debt: 8,500 shares, 7.1 percent coupon bonds outstanding, with 14 years to maturity and a price of $1,026. Bonds pay interest semiannually.

· Common stock: 265,000 shares selling for $76 per share; stock beta is 0.92 and will pay dividend of $2.48 next year. The dividend is expected to grow by 4 percent per year indefinitely

· Preferred stock: 7,500 shares, 6 percent dividend, selling at $88 per share.

You also know the return on market portfolio is 13.2%; risk-free rate is 4.5%; and firm tax rate is 34%.

a. What is the cost of equity using CAPM? What is cost of equity using dividend growth model? What is your estimate of the cost of equity, based on the above results?

b. What is before tax cost of debt? What is after-tax cost of debt?

c. What is cost of preferred stock?

d. What are the firm❝s capital structure weights of equity, debt, and preferred stock?

e. Calculate the WACC for this firm.

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