2.99
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You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2 million. Investors are willing to provide you with $2 million in initial capital in exchange for 50% of the unlevered equity in the firm.

a. What is the total market value of the firm without leverage?

b. Suppose you borrow $1 million. According to MM, what fraction of the firm’s equity will you need to sell to raise the additional $1 million you need?

c. What is the value of your share of the firm’s equity in cases (a) and (b)?

** >** Your firm has an ROE of 12%, a payout ratio of 25%, $600,000 of stockholders’ equity, and $400,000 of debt. If you grow at your sustainable growth rate this year, how much additional debt will you need to issue?

** >** Did KMS’s expansion plan call for it to grow slower or faster than its sustainable growth rate?

** >** Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition, Rumolt has issued bonds with a total current market value of $150 million. Suppose Rumolt’s equity cost of capital is 10%, and its debt cost of capital is 5%. a.

** >** Using the information in the table below, calculate this companyâ€™s: a. Internal growth rate. b. Sustainable growth rate. c. Sustainable growth rate if it pays out 40% of its net income as a dividend.
Net Income 50,000 Beginning Tota

** >** Assuming that KMSâ€™s market share will increase by 0.25% per year (implying that the investment, financing, and depreciation will be adjusted as described in Problems 13 and 14), and that the working capital assumptions used in the chapt

** >** Under the assumption that KMSâ€™s market share will increase by 0.25% per year, you project the following depreciation: Using this information, project net income through 2015 (that is, reproduce Table 18.8 under the new assumptions).

** >** Under the assumption that KMS’s market share will increase by 0.25% per year, you determine that the plant will require an expansion in 2012. The expansion will cost $20 million. Assuming that the financing of the expansion will be delayed accordingly, c

** >** Assume that KMS’s market share will increase by 0.25% per year rather than the 1% used in the chapter (see Table 18.5) and that its prices remain as in the chapter. What production capacity will KMS require each year? When will an expansion become necess

** >** Use the following income statement and balance sheet for Global Corp.: If Global decides that it will limit its net new financing to no more than $9 million, how will this affect its payout policy?
Figures in $ millions Net sales 186.7 Assets Costs E

** >** Use the following income statement and balance sheet for Global Corp.: What is the amount of net new financing needed for Global?
Figures in $ millions Net sales 186.7 Assets Costs Except Depreciation -175.1 Cash 23.2 EBITDA 11.6 Accounts Receivable

** >** Use the following income statement and balance sheet for Global Corp.: Assume that Global pays out 50% of its net income. Use the percent of sales method to forecast stockholdersâ€™ equity.
Figures in $ millions Net sales 186.7 Assets

** >** Suppose the board of Natsam Corporation decided to do the share repurchase in Problem 7(b), but you as an investor would have preferred to receive a dividend payment. How can you leave yourself in the same position as if the board had elected to make the

** >** Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend. a. What is the ex-dividend p

** >** Rogot Instruments makes fine violins, violas, and cellos. It has $1 million in debt outstanding, equity valued at $2 million, and pays corporate income tax at a rate of 35%. Its cost of equity is 12% and its cost of debt is 7%. a. What is Rogot’s pretax

** >** EJH Company has a market capitalization of $1 billion and 20 million shares outstanding. It plans to distribute $100 million through an open market repurchase. Assuming perfect capital markets: a. What will the price per share of EJH be right before the

** >** Suppose that KMS in Problem 4 decides to initiate a dividend instead, but it wants the present value of the payout to be the same $20 million. If its cost of equity capital is 10%, to what amount per year in perpetuity should it commit (assuming perfect

** >** KMS corporation has assets of $500 million, $50 million of which are cash. It has debt of $200 million. If KMS repurchases $20 million of its stock: a. What changes will occur on its balance sheet? b. What will its new leverage ratio be?

** >** ECB Co. has 1 million shares outstanding selling at $20 per share. It plans to repurchase 100,000 shares at the market price. What will its market capitalization be after the repurchase? What will its stock price be?

** >** RFC Corp. has announced a $1 dividend. If RFC’s last price while trading cum dividend is $50, what should its first ex-dividend price be (assuming perfect capital markets)?

** >** ABC Corporation announced that it would pay a dividend to all shareholders of record as of Monday, April 5, 2010. It takes three business days after a purchase for the new owners of a share of stock to be registered. a. What was the date of the ex-divide

** >** After the market close on May 11, 2001, Adaptec, Inc., distributed a dividend of shares of the stock of its software division, Roxio, Inc. Each Adaptec shareholder received 0.1646 share of Roxio stock per share of Adaptec stock owned. At the time, Adapte

** >** If Berkshire Hathaway’s A shares are trading at $120,000, what split ratio would it need to bring its stock price down to $50?

** >** Suppose the stock of Host Hotels & Resorts is currently trading for $20 per share. a. If Host issues a 20% stock dividend, what would its new share price be? b. If Host does a 3:2 stock split, what would its new share price be?

** >** FCF Co. has 20,000 shares outstanding and a total market value of $1 million, $300 thousand of which is debt and the other $700 thousand is equity. It is planning a 10% stock dividend. a. What is the stock price before the dividend and what will it be af

** >** Arnell Industries has $10 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell’s marginal tax rate is expected to be 35% for the foreseeable future. a. Suppose Arnell pays interest of 6% per year on its debt. What i

** >** AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

** >** AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

** >** AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

** >** AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

** >** AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

** >** Redo Problem 11, but assume that investors pay a 15% tax on dividends but no capital gains taxes, and that Kay does not pay corporate taxes. Data from Problem 11: Assume perfect capital markets. Kay Industries currently has $100 million invested in shor

** >** Redo Problem 11, but assume that Kay must pay a corporate tax rate of 35%, and that investors pay no taxes. Data from Problem 11: Assume perfect capital markets. Kay Industries currently has $100 million invested in short-term Treasury securities paying

** >** Assume perfect capital markets. Kay Industries currently has $100 million invested in short-term Treasury securities paying 7%, and it pays out the interest payments on these securities as a dividend. The board is considering selling the Treasury securit

** >** You purchased CSH stock for $40 and it is now selling for $50. The company has announced that it plans a $10 special dividend. a. Assuming 2010 tax rates, if you sell the stock or wait and receive the dividend, will you have different after-tax income? b

** >** Info Systems Technology (IST) manufactures microprocessor chips for use in appliances and other applications. IST has no debt and 100 million shares outstanding. The correct price for these shares is either $14.50 or $12.50 per share. Investors view both

** >** Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year. Suppose that the marginal corporate tax rate is 40%, and that the interest tax shield

** >** Empire Industries forecasts net income this coming year as shown below (in thousands of dollars): Approximately $200,000 of Empireâ€™s earnings will be needed to make new, positive-NPV investments. Unfortunately, Empireâ€™

** >** You own a firm, and you want to raise $30 million to fund an expansion. Currently, you own 100% of the firm’s equity, and the firm has no debt. To raise the $30 million solely through equity, you will need to sell two-thirds of the firm. However, you wou

** >** Zymase is a biotechnology start-up firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after taxes) and their likelihood for each strategy are shown below. The risk of each project is diversifiable. a. Which p

** >** Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year. If left vacant, the land will be worth $10 million in one year. Alternatively, the firm can develop the land at an upfront cost of

** >** The HNH Corporation will pay a constant dividend of $2 per share, per year, in perpetuity. Assume all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in HNH stock is 12%. a. What is the price

** >** Assume that Microsoft has a total market value of $300 billion and a marginal tax rate of 35%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13% of its current market value, what is the present value of the ta

** >** Grommit Engineering expects to have net income next year of $20.75 million and free cash flow of $22.15 million. Grommit’s marginal corporate tax rate is 35%. a. If Grommit increases leverage so that its interest expense rises by $1 million, how will its

** >** Pelamed Pharmaceuticals had EBIT of $325 million in 2010. In addition, Pelamed had interest expenses of $125 million and a corporate tax rate of 40%. a. What was Pelamed’s 2010 net income? b. What was the total of Pelamed’s 2010 net income and interest p

** >** Suppose Microsoft has no debt and a WACC of 9.2%. The average debt-to-value ratio for the software industry is 5%. 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%?

** >** Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage. a. Suppose Hardmon borrows to the point that its debt-equity rati

** >** Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of $800 or $1000 each year. After paying any interest on deb

** >** Marpor Industries has no debt and expects to generate free cash flows of $16 million each year. Marpor believes that if it permanently increases its level of debt to $40 million, the risk of financial distress may cause it to lose some customers and rece

** >** Acort Industries owns assets that will have an 80% probability of having a market value of $50 million in one year. There is a 20% chance that the assets will be worth only $20 million. The current risk-free rate is 5%, and Acort’s assets have a cost of

** >** Consider a project with free cash flows in one year of $130,000 or $180,000, with each outcome being equally likely. The initial investment required for the project is $100,000, and the project’s cost of capital is 20%. The risk-free interest rate is 10%

** >** Covan, Inc., is expected to have the following free cash flows: a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 12%, what should its stock price be? b. Covan reinvests all its FCF and ha

** >** Heavy Metal Corporation is expected to generate the following free cash flows over the next five years: After then, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted

** >** Portage Bay Enterprises has $1 million in excess cash, no debt and is expected to have free cash flow of $10 million next year. Its FCF is then expected to grow at a rate of 3% per year forever. If Portage Bay’s equity cost of capital is 11% and it has 5

** >** The present value of JECK Co.’s expected free cash flows is $100 million. If JECK has $30 million in debt, $6 million in cash, and 2 million shares outstanding, what is its share price?

** >** Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $1 million. Its depreciation and capital expenditures will both be $300,000, and it expects its capital expenditures to always equal its depreciation. Its working capital

** >** This year, FCF, Inc., has earnings before interest and taxes of $10 million, depreciation expenses of $1 million, capital expenditures of $1.5 million, and has increased its net working capital by $500,000. If its tax rate is 35%, what is its free cash f

** >** Assume the annual return for the lowest turnover portfolio is 18% and the annual return for the highest turnover portfolio is 12%. If you invest $100,000 and have the highest turnover, how much lower will the value of your portfolio be at the end of ten

** >** Hawar International is a shipping firm with a current share price of $5.50 and 10 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $20 million and repurchasing shares that Hawar pays a corporate tax

** >** You have a $100,000 portfolio made up of 15 stocks. You trade each stock five times this year and each time you trade, you pay about $30 in commissions and spread. You have no special knowledge, so you only earn the average market return of 12% on your i

** >** Apnex, Inc., is a biotechnology firm that is about to announce the results of its clinical trials of a potential new cancer drug. If the trials were successful, Apnex stock will be worth $70 per share. If the trials were unsuccessful, Apnex stock will be

** >** Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decrease Roybus’s free cash flow by $180 million at the end

** >** Assume that Cola Company has a share price of $43. The firm will pay a dividend of $1.24 in one year, and you expect Cola Co. to raise this dividend by approximately 7% per year in perpetuity. a. If Cola Co.’s equity cost of capital is 8%, what share pri

** >** Summit Systems has an equity cost of capital of 11%, will pay a dividend of $1.50 in one year and its dividends had been expected to grow by 6% per year. You read in the paper that Summit has revised its growth prospects and now expects its dividends to

** >** Suppose Rocky Shoes and Boots has earnings per share of $2.30 and EBITDA of $30.7 million. The firm also has 5.4 million shares outstanding and debt of $125 million (net of cash). You believe Deckers Outdoor Corporation is comparable to Rocky Shoes and B

** >** Suppose that in May 2010, Nike had sales of $19,176 million, EBITDA of $2,809 million, excess cash of $3,500 million, $437 million of debt, and 485.7 million shares outstanding. a. Using the average enterprise value to sales multiple in Table 10.1, estim

** >** Suppose that in May 2010, Nike had EPS of $3.51 and a book value of equity of $18.92 per share. a. Using the average P/E multiple in Table 10.1, estimate Nikeâ€™s share price. b. What range of share prices do you estimate based on the hig

** >** After researching the competitors of EJH Enterprises, you determine that most comparable firms have the following valuation ratios (see MyFinanceLab for the data in Excel format): EJH Enterprises has EPS of $2, EBITDA of $300 million, $30 million in cash

** >** CSH has EBITDA of $5 million. You feel that an appropriate EV/EBITDA ratio for CSH is 9. CSH has $10 million in debt, $2 million in cash, and 800,000 shares outstanding. What is your estimate of CSH’s stock price?

** >** Now suppose that with leverage, Kohwe’s expected free cash flows will decline to $9 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 8%. What i

** >** You notice that Dell Computers has a stock price of $27.85 and EPS of $1.26. Its competitor Hewlett-Packard has EPS of $2.47. What is one estimate of the value of a share of Hewlett-Packard stock?

** >** Consider the valuation of Nike given in Example 10.1. a. Suppose you believe Nike’s initial revenue growth rate will be between 7% and 11% (with growth always slowing linearly to 5% by year 2015). What range of prices for Nike stock is consistent with th

** >** Sora Industries has 60 million outstanding shares, $120 million in debt, $40 million in cash, and the following projected free cash flow for the next four years (see MyFinanceLab for the data in Excel format): a. Suppose Soraâ€™s revenues

** >** You are invested in GreenFrame, Inc. The CEO owns 3% of GreenFrame and is considering an acquisition. If the acquisition destroys $50 million of GreenFrame’s value, but the present value of the CEO’s compensation increases by $5 million, will he be bette

** >** If companies in the same industry as TargetCo (from Problem 1) are trading at multiples of 14 times earnings, what would be one estimate of an appropriate premium for TargetCo? Information from Problem 1 Your company has earnings per share of $4. It has

** >** Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $25. You wil

** >** You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company. UnderWater’s stock price is $20, and it has 2 million shares outstanding. You believe that if you buy the company and replace its management, its value will

** >** BAD Company’s stock price is $20, and the firm has 2 million shares outstanding. You believe you can increase the company’s value if you buy it and replace the management. Assume that BAD has a poison pill with a 20% trigger. If it is triggered, all BAD’

** >** ABC has 1 million shares outstanding, each of which has a price of $20. It has made a takeover offer of XYZ Corporation, which has 1 million shares outstanding and a price per share of $2.50. Assume that the takeover will occur with certainty and all mar

** >** Let’s reconsider part (b) of Problem 1. The actual premium that your company will pay for TargetCo when it completes the transaction will not be 20%, because on the announcement the target price will go up and your price will go down to reflect the fact

** >** Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe’s corporate tax rate is 40%, and expected free cash flows ar

** >** The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading for $35 per share and LE is trading for $25 per share, implying a premerger value of LE of $4 billion. If the projected synergies are $1 billion, what is the maximum exchan

** >** Loki, Inc., and Thor, Inc., have entered into a stock-swap merger agreement whereby Loki will pay a 40% premium over Thor’s premerger price. If Thor’s premerger price per share was $40 and Loki’s was $50, what exchange ratio will Loki need to offer?

** >** You own a put option on Ford stock with a strike price of $10. The option will expire in exactly six months’ time. a. If the stock is trading at $8 in six months, what will be the payoff of the put? b. If the stock is trading at $23 in six months, what w

** >** Assume that you have shorted the call option in Problem 2. a. If the stock is trading at $55 in three months, what will you owe? b. If the stock is trading at $35 in three months, what will you owe? c. Draw a payoff diagram showing the amount you owe at

** >** You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time. a. If the stock is trading at $55 in three months, what will be the payoff of the call? b. If the stock is trading at $35 in three mon

** >** Below is an option quote on IBM from the CBOE Web site. a. Which option contract had the most trades today? b. Which option contract is being held the most overall? c. Suppose you purchase one option with symbol IBM GA-E. How much will you need to pay yo

** >** Express the position of an equity holder in terms of put options.

** >** You happen to be checking the newspaper and notice an arbitrage opportunity. The current stock price of Intrawest is $20 per share and the one-year risk-free interest rate is 8%. A one-year put on Intrawest with a strike price of $18 sells for $3.33, whi

** >** Dynamic Energy Systems stock is currently trading for $33 per share. The stock pays no dividends. A one-year European put option on Dynamic with a strike price of $35 is currently trading for $2.10. If the risk-free interest rate is 10% per year, what is

** >** You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $40 and the exercise price of the second call is $60. In addition, you are short two otherwise identical calls, both with an exercise p

** >** Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5 million shares outstanding, and it has no other a

** >** Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest and taxes each year with no risk. The firm’s capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. T

** >** Suppose all possible investment opportunities in the world are limited to the five stocks listed in the table below. What are the market portfolio weights?
Number of Shares Stock Price/Share ($) Outstanding (millions) 10 10 20 12 8 3 50 1 E 45 20 ABc

** >** Your client has $100,000 invested in stock A. She would like to build a two-stock portfolio by investing another $100,000 in either stock B or C. She wants a portfolio with an expected return of at least 14% and as low a risk as possible, but the standar

** >** You have a portfolio with a standard deviation of 30% and an expected return of 18%. You are considering adding one of the two stocks in the table below. If after adding the stock you will have 20% of your money in the new stock and 80% of your money in

** >** Suppose Johnson & Johnson and the Walgreen Company have the expected returns and volatilities shown below, with a correlation of 22%. For a portfolio that is equally invested in Johnson & Johnsonâ€™s and Walgreenâ€™

** >** The fact that Cola Co. and Gas Co. have a correlation of 0.6083, calculate the volatility (standard deviation) of a portfolio that is 55% invested in Cola Co. stock and 45% invested in Gas Co. stock. Calculate the volatility by a. Using Eq. 12.4, b. Cal

** >** You have just purchased a share of stock for $20. The company is expected to pay a dividend of $0.50 per share in exactly one year. If you want to earn a 10% return on your investment, what price do you need if you expect to sell the share immediately af

** >** How much of the return in Problem 1 came from dividend yield and how much came from capital gain? In Problem 1 You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today

** >** Using the data in the table below, calculate the return for investing in this stock from January 1 to December 31. Prices are after the dividend has been paid.
Stock and Dividend Data Date Price Dividend Jan 1 33.88 Feb 5 30.67 0.17 May 14 29.49 0.17