0 оценок0% нашли этот документ полезным (0 голосов)

5 просмотров8 страницJun 10, 2020

© © All Rights Reserved

PDF, TXT или читайте онлайн в Scribd

© All Rights Reserved

0 оценок0% нашли этот документ полезным (0 голосов)

5 просмотров8 страниц© All Rights Reserved

Вы находитесь на странице: 1из 8

Advanced Corporate Finance

Group Assignment

Submission date: may 31,2020

E-mail address: abaymesy13@gmail.com

Bond Valuation

1. Is the yield to maturity on a bond the same thing as the required return? Is YTM the same

thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years

from now, the required return on the same bond is 8 percent. What is the coupon rate on the

bond then? The YTM?

2. Suppose you buy a 7 percent coupon, 20-year bond today when it’s ﬁrst issued. If interest

rates suddenly rise to 15 percent, what hap-pens to the value of your bond? Why?

3. Carpenter, Inc., has 8 percent coupon bonds on the market that have 10 years left to maturity.

The bonds make annual payments. If the YTM on these bonds is 9 percent, what is the

current bond price?

4. Linebacker Co. has 7 percent coupon bonds on the market with nine years left to maturity.

The bonds make annual payments. If the bond currently sells for $1,080, what is its YTM?

5. Hawk Enterprises has bonds on the market making annual payments, with 16 years to

maturity, and selling for $870. At this price, the bonds yield 7.5 percent. What must the

coupon rate be on the bonds?

6. Cutler Co. issued 11-year bonds a year ago at a coupon rate of 7.8 percent. The bonds make

semiannual payments. If the YTM on these bonds is 8.6 percent, what is the current bond

price?

7. Ngata Corp. issued 12-year bonds 2 years ago at a coupon rate of 9.2 percent. The bonds

make semiannual payments. If these bonds currently sell for 104 percent of par value, what is

the YTM?

8. Wimbley Corporation has bonds on the market with 14.5 years to maturity, a YTM of 6.8

percent, and a current price of $1,136.50. The bonds make semiannual payments. What must

the coupon rate be on these bonds?

9. The Mangold Corporation has two different bonds currently outstanding. Bond M has a face

value of $20,000 and matures in 20 years. The bond makes no payments for the ﬁrst six

years, then pays $1,100 every six months over the subsequent eight years, and ﬁnally pays

$1,400 every six months over the last six years. Bond N also has a face value of $20,000 and

a maturity of 20 years; it makes no coupon payments over the life of the bond. If the required

return on both these bonds is 9 percent compounded semiannually, what is the current price

of bond M? Of bond N?

Stock valuation

1. The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.60 per share on its

stock. The dividends are expected to grow at a constant rate of 6 percent per year

indeﬁnitely. If investors require a 12 percent return on the Jackson–Timberlake Wardrobe

Co. stock, what is the current price? What will the price be in three years? In 15 years?

2. The next dividend payment by Top Knot, Inc., will be $2.50 per share. The dividends are

anticipated to maintain a 5 percent growth rate forever. If the stock currently sells for

$48.00 per share, what is the required return?

3. For the company in the previous problem, what is the dividend yield? What is the

expected capital gains yield?

4. Stairway Corporation will pay a $3.60 per share dividend next year. The company

pledges to increase its dividend by 4.5 percent per year indeﬁnitely. If you require an 11

percent return on your investment, how much will you pay for the company’s stock

today?

5. Listen Close Co. is expected to maintain a constant 6.5 percent growth rate in its

dividends indeﬁnitely. If the company has a dividend yield of 3.6 percent, what is the

required return on the company’s stock?

6. Suppose you know that a company’s stock currently sells for $60 per share and the

required return on the stock is 12 percent. You also know that the total return on the stock

is evenly divided between a capital gains yield and a dividend yield. If it’s the company’s

policy to always maintain a constant growth rate in its dividends, what is the current

dividend per share?

7. No More Corp. pays a constant $11 dividend on its stock. The company will maintain

this dividend for the next eight years and will then cease paying dividends forever. If the

required return on this stock is 10 percent, what is the current share price?

8. Ayden, Inc., has an issue of preferred stock outstanding that pays a $6.50 dividend every

year in perpetuity. If this issue currently sells for $113 per share, what is the required

return?

9. Great Pumpkin Farms just paid a dividend of $3.50 on its stock. The growth rate in

dividends is expected to be a constant 5 percent per year indeﬁnitely. Investors require a

16 percent return on the stock for the ﬁrst three years, a 14 percent return for the next

three years, and an 11 percent return thereafter. What is the current share price?

10. Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the

stock over the next nine years because the ﬁrm needs to plow back its earnings to fuel

growth. The company will pay a $10 per share dividend in 10 years and will increase the

dividend by 6 percent per year thereafter. If the required return on this stock is 13

percent, what is the current share price?

11. Spears, Inc., has an odd dividend policy. The company has just paid a dividend of $7 per

share and has announced that it will increase the dividend by $4 per share for each of the

next four years, and then never pay another dividend. If you require an 11 percent return

on the company’s stock, how much will you pay for a share today?

12. North Side Corporation is expected to pay the following dividends over the next four

years: $8, $7, $5, and $2. Afterward, the company pledges to maintain a constant 5

percent growth rate in dividends forever. If the required return on the stock is 11

percent, what is the current share price?

13. Rizzi Co. is growing quickly. Dividends are expected to grow at a 25 percent rate for the

next three years, with the growth rate falling off to a constant 7 percent thereafter. If the

required return is 13 percent and the company just paid a $3.10 dividend, what is the

current share price?

14. Rebel, Inc., is proposing a rights offering. Presently there are 400,000 shares outstanding

at $75 each. There will be 70,000 new shares offered at $70 each.

a. What is the new market value of the company?

b. How many rights are associated with one of the new shares?

c. What is the ex-rights price?

d. What is the value of a right?

e. Why might a company have a rights offering rather than a general cash offer?

15. The Clifford Corporation has announced a rights offer to raise $50 million for a new

journal, the Journal of Financial Excess. This journal will review potential articles after

the author pays a nonrefundable reviewing fee of $5,000 per page. The stock currently

sells for $60 per share, and there are 5.2 million shares outstanding.

a. What is the maximum possible subscription price? What is the minimum?

b. If the subscription price is set at $55 per share, how many shares must be sold?

c. How many rights will it take to buy one share?

d. What is the ex-rights price? What is the value of a right?

e. Show how a shareholder with 1,000 shares before the offering and no desire (or

money) to buy additional shares is not harmed by the rights offer.

16. Red Shoe Co. has concluded that additional equity financing will be needed to expand

operations and that the needed funds will be best obtained through a rights offering. It has

correctly determined that as a result of the rights offering, the share price will fall from

$70 to $62.75 ($70 is the rights-on price; $62.75 is the ex-rights price, also known as the

when-issued price). The company is seeking $15 million in additional funds with a per-

share subscription price equal to $40. How many shares are there currently, before the

offering? (Assume that the increment to the market value of the equity equals the gross

proceeds from the offering.)

17. The Woods Co. and the Mickelson Co. have both announced IPOs at $40 per share. One

of these is undervalued by $8, and the other is overvalued by $5, but you have no way of

knowing which is which. You plan to buy 1,000 shares of each issue. If an issue is

underpriced, it will be rationed, and only half your order will be filled. If you could get

1,000 shares in Woods and 1,000 shares in Mickelson, what would your profit be? What

profit do you actually expect?

What principle have you illustrated?

18. The Educated Horses Corporation needs to raise $40 million to finance its expansion into

new markets. The company will sell new shares of equity via a general cash offering to

raise the needed funds. If the offer price is $35 per share and the company’s underwriters

charge an 8 percent spread, how many shares need to be sold?

19. In the previous problem, if the SEC filing fee and associated administrative expenses of

the offering are $900,000, how many shares need to be sold?

Capital Structure

1. Wild Side, Inc., has no debt outstanding and a total market value of $200,000. Earnings

before interest and taxes, EBIT, are projected to be $25,000 if economic conditions are

normal. If there is strong expansion in the economy, then EBIT will be 40 percent higher. If

there is a recession, then EBIT will be 60 percent lower. Wild Side is considering a $70,000

debt issue with a 6 percent interest rate. The proceeds will be used to repurchase shares of

stock. There are currently 4,000 shares outstanding. Ignore taxes for this problem.

a. Calculate earnings per share (EPS) under each of the three economic scenarios

before any debt is issued. Also calculate the percentage changes in EPS when the

economy expands or enters a recession.

b. Repeat part (a) assuming that Wild Side goes through with recapitalization.

What do you observe?

2. Repeat parts (a) and (b) in Problem 1 assuming Wild Side has a tax rate of 35 percent.

3. Suppose the company in Problem 1 has a market-to-book ratio of 1.0.

a. Calculate return on equity (ROE) under each of the three economic scenarios before

any debt is issued. Also calculate the percentage changes in ROE for economic

expansion and recession, assuming no taxes.

b. Repeat part (a) assuming the firm goes through with the proposed recapitalization.

c. Repeat parts (a) and (b) of this problem assuming the firm has a tax rate of 35

percent.

4. Petty Corporation is comparing two different capital structures: an all-equity plan (Plan I)

and a levered plan (Plan II). Under Plan I, Petty would have 200,000 shares of stock

outstanding. Under Plan II, there would be 90,000 shares of stock outstanding and $1.5

million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

a. If EBIT is $150,000, which plan will result in the higher EPS?

b. If EBIT is $300,000, which plan will result in the higher EPS?

c. What is the break-even EBIT?

5. In Problem 4, use M&M Proposition I to find the price per share of equity under each of the

two proposed plans. What is the value of the firm?

6. Kolby Corp. is comparing two different capital structures. Plan I would result in 1,500

shares of stock and $20,000 in debt. Plan II would result in 1,100 shares of stock and $30,000

in debt. The interest rate on the debt is 10 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that

EBIT will be $12,000. The all-equity plan would result in 2,300 shares of stock

outstanding. Which of the three plans has the highest EPS? The lowest?

b. In part (a), what are the break-even levels of EBIT for each plan as compared to

that for an all-equity plan? Is one higher than the other? Why?

c. Ignoring taxes, when will EPS be identical for Plans I and II?

d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 40 percent.

Are the break-even levels of EBIT different from before? Why or why not?

7. Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What

principle is illustrated by your answers?

8. Home Body, Inc., a prominent consumer products firm, is debating whether to convert its all-

equity capital structure to one that is 50 percent debt. Currently, there are 5,000 shares

outstanding, and the price per share is $60. EBIT is expected to remain at $28,000 per year

forever. The interest rate on new debt is 8 percent, and there are no taxes.

a. Allison, a shareholder of the firm, owns 100 shares of stock. What is her cash flow

under the current capital structure, assuming the firm has a dividend payout rate of

100 percent?

b. What will Allison’s cash flow be under the proposed capital structure of the firm?

Assume she keeps all 100 of her shares.

c. Suppose Home Body does convert, but Allison prefers the current all-equity capital

structure. Show how she could unlever her shares of stock to recreate the original

capital structure.

d. Using your answer to part (c), explain why Home Body’s choice of capital structure

is irrelevant.

9. ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure.

ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt;

its stock is worth $400,000 and the interest rate on its debt is 10 percent. Both firms expect

EBIT to be $90,000. Ignore taxes.

a. Rico owns $30,000 worth of XYZ’s stock. What rate of return is he expecting?

b. Show how Rico could generate exactly the same cash flows and rate of return by

investing in ABC and using homemade leverage.

c. What is the cost of equity for ABC? What is it for XYZ?

d. What is the WACC for ABC? For XYZ? What principle have you illustrated?

10. Lamont Corp. uses no debt. The weighted average cost of capital is 11 percent. If the current

market value of the equity is $25 million and there are no taxes, what is EBIT?

11. In the previous question, suppose the corporate tax rate is 35 percent. What is EBIT in this

case? What is the WACC? Explain.

12. Maxwell Industries has a debt– equity ratio of 1.5. Its WACC is 11 percent, and its cost of

debt is 8 percent. The corporate tax rate is 35 percent.

a. What is Maxwell’s cost of equity capital?

b. What is Maxwell’s unlevered cost of equity capital?

c. What would the cost of equity be if the debt– equity ratio were 2? What if it were

1.0? What if it were zero?

13. Second Base Corp. has no debt but can borrow at 7.5 percent. The firm’s WACC is currently

10 percent, and the tax rate is 35 percent.

a. What is Second Base’s cost of equity?

b. If the firm converts to 25 percent debt, what will its cost of equity be?

c. If the firm converts to 50 percent debt, what will its cost of equity be?

d. What is Second Base’s WACC in part (b)? In part (c)?

14. Bruce & Co. expects its EBIT to be $85,000 every year forever. The firm can borrow at 11

percent. Bruce currently has no debt, and its cost of equity is 18 percent. If the tax rate is 35

percent, what is the value of the firm? What will the value be if Bruce borrows $60,000 and

uses the proceeds to repurchase shares?

15. In Problem 14, what is the cost of equity after recapitalization? What is the WACC? What

are the implications for the firm’s capital structure decision?

16. Tool Manufacturing has an expected EBIT of $45,000 in perpetuity and a tax rate of 35

percent. The firm has $80,000 in outstanding debt at an interest rate of 9 percent, and its

unlevered cost of capital is 14 percent. What is the value of the firm according to M&M

Proposition I with taxes? Should Tool change its debt– equity ratio if the goal is to maximize

the value of the firm? Explain

17. Firm Value Old School Corporation expects an EBIT of $12,000 every year forever. Old

School currently has no debt, and its cost of equity is 16 percent. The firm can borrow at 9

percent. If the corporate tax rate is 35 percent, what is the value of the firm? What will the

value be if Old School converts to 50 percent debt? To 100 percent debt?

18. The Veblen Company and the Knight Company are identical in every respect except that

Veblen is not levered. Financial information for the two firms appears in the following table.

All earnings streams are perpetuities, and neither firm pays taxes. Both firms distribute all

earnings available to common stockholders immediately.

a. An investor who can borrow at 6 percent per year wishes to purchase 5 percent of

Knight’s equity. Can he increase his dollar return by purchasing 5 percent of Veblen’s

equity if he borrows so that the initial net costs of the strategies are the same?

b. Given the two investment strategies in (a), which will investors choose? When will

this process cease?