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Absent transactions costs, what is the highest dividend tax rate of an investor who could gain
from trading to capture the dividend?
Problem 23-5 on Preferred Stock Based on Chapter 23 Raising Equity Capital
Three years ago, you founded your own company. You invested $100,000 of your money and
received 5 million shares of Series A preferred stock. Since then, your company has been
through three additional rounds of financing.
Select a major industrial or commercial company based in the United States, and listed on one of
the major stock exchanges in the United States. Each student should select a different company.
Avoid selecting an insurance company or a bank, as the financial ratios for these financial
businesses are different. Write a 7 8 page double spaced paper answering and demonstrating
with calculations and financial data the following questions:
1. What is the name of the company? What is the industry sector?
2. What are the operating risks of the company?
3. What is the financial risk of the company (the debt to total capitalization ratio)?
4. Does the company have any preferred stock?
5. What is the capital structure of the company?: Short term portion of Long Term Debt, Long
Term Debt, Preferred Stock (if any), and market value of Common Stock issued and
outstanding?
6. What is the companys current actual Beta?
7. What would the Beta of this company be if it had no Long Term Debt in its capital structure?
(Apply the Hamada Formula.)
8. What is the companys current Marginal Tax Rate?
9. What is the Cost of Debt, before and after taxes?
10. What is the Cost of Preferred Stock (if any)?
11. What is the Cost of Equity?
12. What is the cash dividend yield on the Common Stock?
13. What is the Weighted Average Cost of Capital of the company?
14. What is the Price Earnings Multiple of the company?
15. How has the companys stock been performing in the last 5 years?
16. How would you assess the overall risk structure of the company in terms of its Operating
Risks and Financial Risk (Debt to Capitalization Ratio)?
17. Would you invest in this company? Why? Or Why not?
18. The last page of your paper should be a Bibliography of the sources you used to prepare this
paper.
FIN 516 Week 2 Homework
Problem 14-11 Based on Chapter 14: WACC and Modigiani & Miller Extension Models With
Growth Assumptions
Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.114.3).
Suppose she funds the project by borrowing $750 rather than $500.
a. According to MM Proposition I, what is the value of the equity? What are its cash flows if the
economy is strong? What are its cash flows if the economy is weak?
b. What is the return of the equity in each case? What is its expected return?
c. What is the risk premium of equity in each case? What is the sensitivity of the levered equity
return to systematic risk? How does its sensitivity compare to that of unlevered equity? How
does its risk premium compare to that of unlevered equity?
d. What is the debt-equity ratio of the firm in this case?
e. What is the firms WACC in this case?
Problem 14-18 Based on Chapter 14: WACC and Modigliani & Miller Extension Models With
Growth Assumptions
In mid-2012, AOL Inc. had $100 million in debt, total equity capitalization of $3.1 billion, and
an equity beta of 0.90 (as reported on Yahoo! Finance). Included in AOLs assets was $1.5
billion in cash and risk-free securities. Assume that the risk-free rate of interest is 3% and the
market risk premium is 4%.
a. What is AOLs enterprise value?
b. What is the beta of AOLs business assets?
c. What is AOLs WACC?
Problem 15-15 Based on Chapter 15: Debt and Taxes
Acme Storage has a market capitalization of $100 million and debt outstanding of $40 million.
Acme plans to maintain this same debt-equity ratio in the future. The firm pays an interest rate of
7.5% on its debt and has a corporate tax rate of 35%.
a. If Acmes free cash flow is expected to be $7 million next year and is expected to grow at a
rate of 3% per year, what is Acmes WACC?
b. What is the value of Acmes interest tax shield?
FIN 516 Week 3 Homework
Problem 20-6 on Call Options Based on Chapter 20
(Excel file included)
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly
3 months time.
a) If the stock is trading at $55 in 3 months, what will be the payoff of the call?
b) If the stock is trading at $35 in 3 months, what will be the payoff of the call?
c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock
price at expiration.
Problem 20-8 on Put Options Based on Chapter 20
(Excel file included)
You own a put option on Ford stock with a strike price of $10. The option will expire in exactly
6 months time.
a) If the stock is trading at $8 in 6 months, what will be the payoff of the put?
b) If the stock is trading at $23 in 6 months, what will be the payoff of the put?
c) Draw a payoff diagram showing the value of the put at expiration as a function of the stock
price at expiration.
Problem 20-11 on Return on Options Based on Chapter 20
Consider the September 2012 IBM call and put options in Problem 20-3. Ignoring any interest
you might earn over the remaining few days life of the options, consider the following.
a) Compute the break-even IBM stock price for each option (i.e., the stock price at which your
total profit from buying and then exercising the option would be 0).
b) Which call option is most likely to have a return of 100%?
c) If IBMs stock price is $216 on the expiration day, which option will have the highest return?
Problem 21-12 on Option Valuation Using the Black Scholes Model Based on Chapter 21
Rebecca is interested in purchasing a European call on a hot new stockUp, Inc. The call has a
strike price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock
has a standard deviation of 40% per year. The risk-free interest rate is 6.18% per year.
a) Using the Black-Scholes formula, compute the price of the call.
b) Use put-call parity to compute the price of the put with the same strike and expiration date.
Problem 30-14 on Swaps Based on Chapter 30
Your firm needs to raise $100 million in funds. You can borrow short-term at a spread of 1%
over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.50% over
10-year treasuries, which currently yield 7.60%. Current 10-year interest rate swaps are quoted at
LIBOR versus the 8% fixed rate.
Management believes that the firm is currently underrated and that its credit rating is likely to
improve in the next year or two. Nevertheless, the managers are not comfortable with the interest
rate risk associated with using short-term debt.
Problem 30-6 on Futures Contract Based on Chapter 30
(Excel file included)
Your utility company will need to buy 100,000 barrels of oil in 10 days, and it is worried about
fuel costs. Suppose you go long 100 oil futures contracts, each for 1,000 barrels of oil, at the
current futures price of $60 per barrel. Suppose futures prices change each day as follows.
The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax
rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its
yen cost of debt because they are considering launching a new bond issue in Tokyo to raise
money for a new investment there.
The risk-free interest rates on dollars and yen are r$ = 5% and r = 1%, respectively. Coval
Consulting is willing to assume that capital markets are internationally integrated and that its free
cash flows are uncorrelated with the yen-dollar spot rate.
What is Coval Consultings after-tax cost of debt in yen? (Hint: Start by finding the after-tax cost
of debt in dollars and then find the yen equivalent.)
Problem 31-12 on Credit and Exchange Rate Risk Based on Chapter 31 International Corporate
Finance
Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28
rubles per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-
free interest rate is 4.5%, what is the implied credit spread for Russian government bonds?
Problem 30-9 on Forward Market Hedge Based on Chapter 30 Risk Management
Question 1.1. (TCO B) Which of the following statements concerning the MM extension
with growth is not correct?
(a) The tax shields should be discounted at the unlevered cost of equity.
(b) The value of a growing tax shield is greater than the value of a constant tax shield.
(c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under
MMs original (with tax) assumptions.
(d) For a given D/S, the WACC is greater than the WACC under MMs original (with tax)
assumptions.
(e) The total value of the firm is independent of the amount of debt it uses.
Question 4.4. (TCO I) Suppose hockey skates sell in Canada for 105 Canadian dollars, and
1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is
the price of hockey skates in the United States?
(a) $14.79
(b) $63.00
(c) $74.55
(d) $85.88
(e) $147.88 (Points : 20)