FIN620_Quiz HW 4
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Apr 3, 2024
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Quiz HW 4 - Capital Structure and MM Question 1 1/ 1 point Boris Corporation is financed with 26 percent debt and the rest equity. It has a leveraged beta of 0.6 and is subject to a 30% corporate tax rate. What is Boris's unleveraged beta? Round the answer to two decimals. Answer: 048 v D View question 1 feedback Question 2 1/ 1 point The current value of a firm is $35,484 and it is 100% equity financed. The firm is considering restructuring so that it is 10% debt financed. If the firm's corporate tax rate is 20%, what will be the new value of the firm under the MM theory without taxes, transactions costs, or the possibility of bankruptcy? Round the answer to two decimals. Answer: 35,484.00 v D View question 2 feedback Question 3 1/ 1 point The current value of a firm is $216,641 and it is 100% equity financed. The firm is considering restructuring so that it is 33% debt financed. If the firm's corporate tax rate is 30%, what will be
the new value of the firm under the MM theory with corporate taxes but no possibility of bankruptcy. Round to answer to two decimals. Answer: 238,088.46 v D View question 3 feedback Question 4 1/ 1 poin The current value of a firm is $740,755 and it is 100% equity financed. The firm is considering restructuring so that it is 11% debt financed. If the firm's corporate tax rate is 20%, the typical personal tax rate of an investor in the firm's stock is 25%, and the typical tax rate for an investor in the firm's debt is 15%, what will be the new value of the firm under the MM theory with corporate taxes but no possibility of bankruptcy. Round the answer to two decimals. Answer: 764,720.60 v D> View question 4 feedback Question 5 1/ 1 poin A firm is considering two different financing capital structures (CS1 and CS2). In the first capital structure CS1 the firm will issue equity which will pay expected dividends of $2 million every year perpetually, and debt of maturity 10 years that will pay expected coupons of $3 million annually (6% of face value of $50 million). The equity is discounted at a rate of 9.40% annually, and the debt is discounted a rate of 6% annually. In the second capital structure the firm will issue equity which will pay expected dividends of $4 million every year perpetually, and debt of maturity 10 years that will pay coupons of $1 million annually (8% of face value of $12.5 million). The debt is discounted a rate of 8% annually. What is the rate of discount for equity in CS2? Assume that Modigliani-Miller and its assumptions are true. Round the answer to two decimals in percentage form. Please write % sign in the units box. Arermee
681 v % D View question 5 feedback Question 6 1/ 1 point A firm has 1,000,000 shares outstanding with a price per share of $23.51 (previous to any dividend payment). It decides to pay out cash dividend of $2,000,000. What will the share price be after the dividend has been paid? Assume that Modigliani-Miller and its assumptions are true. Answer: 2151 v D> View question 6 feedback Question 7 2/ 2 points A firm has 10,000,000 shares outstanding with a price per share of $24.90 (previous to "Rights Issue"). It does a "Rights Issue" where it offers 2,000,000 shares to existing shareholders at a price of $15.80. A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. https:/www.investopedia.com/investing/understanding-rights-issues/ The "Rights Issue" is fully subscribed, that is existing shareholders purchase all the shares offered. What will the share price be after the dividend has been paid? Round the answer to two decimals. Assume that Modigliani-Miller and its assumptions are true. Answer: 2338 v
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D> View question 7 feedback Question 8 2/ 2 points A firm has 10,000,000 shares outstanding with a price per share of $20.70 (previous to a share repurchase). The firm repurchases 2,000,000 shares with a price per share of $27.00. A share repurchase is a transaction whereby a company buys back its own shares from the marketplace. (As the repurchase price is greater than the market price, equity holders may sell shares to the firm only in proportion to their holding.) https:/www.investopedia.com/terms/s/sharerepurchase.asp What will the share price be after the share repurchase is completed? Assume that Modigliani-Miller and its assumptions are true. Round the answer to two decimals. Answer: 1918 v Attempt Score:10 / 10 - 100 % Overall Grade (highest attempt):10 / 10 - 100 %
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Module 6 Question 2
(Individual or component costs of capital) Compute the cost of capital for the firm for the following:
a. Currently bonds with a similar credit rating and maturity as the firm's outstanding debt are selling to yield
8.00 percent while the borrowing firm's corporate tax rate is 34 percent.
b. Common stock for a firm that paid a $1.05 dividend last year. The dividends are expected to grow at a rate of
5.0 percent per year into the foreseeable future. The price of this stock is now $25.00.
c. A bond that has a $1,000 par value and a coupon interest rate of 12.0 percent with interest paid semiannually. A new issue would sell for $1,150 per bond and mature in 20 years. The firm's tax rate is 34 percent.
d. A preferred stock paying a dividend of 7.0 percent on a $100 par value. If a new issue is offered, the shares would sell for $85.00 per share.
a. The after-tax cost of debt debt for the firm is ________%.
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Problem 1 - Cost of Capital
Bob-Bye, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The WACC is to be measured by using the following weights:: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm’s tax is 30%.
Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at a 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond.
Preferred Stock: 8 percent (annual divided) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2 per share must be paid to the underwriters.
Common Stock: The firm’s common stock is currently selling for P50 per share. The dividend expected to be paid at the end of the coming year is P4 per share..
Its dividend payments which have been approximately 60% of earnings per share…
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The common stock of ABX, Inc. has a beta of 0.90. The Treasury bill rate is 4% and the market risk premium is estimated at 8%. The debt-to-equity ratio of the company is 0.35, the cost of debt is 6%, and the tax rate is 21%. The company is considering a project that will result in initial after-tax cash savings of $5 million at the end of the first year, and these savings will grow at a rate of 4% per year indefinitely. The project is less risky than the usual project the firm undertakes. Management uses the subjective approach and applies an adjustment factor of -1% to the overall cost of capital for similar projects. If the project requires an initial investment of $20 million, what is the NPV?
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- Give proper answer for this questionarrow_forwardProblem 1 - Cost of Capital Bob-Bye, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The WACC is to be measured by using the following weights:: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm’s tax is 30%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at a 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred Stock: 8 percent (annual divided) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2 per share must be paid to the underwriters. Common Stock: The firm’s common stock is currently selling for P50 per share. The dividend expected to be paid at the end of the coming year is P4 per share.. Its dividend payments which have been approximately 60% of earnings per share…arrow_forwardhello tutor please help me Solv correct answerarrow_forward
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