5. MM Proposition 2: McLaren Corp is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 8 and a cost of equity of 12.5%. The company's stock is selling for $50. The firm decides to repurchase half its shares and substitute an equal value of debt (issue debt and use the proceeds to buy back shares). The debt is riskOfree, with an interest rate of 5%. The company is exempt from corporate income taxes. Assuming MM are correct, calculate the following items after refinancing. a. The cost of equity. b. The overall cost of capital. c. The price-earnings ratio. d. The stock price. e. The stock's beta. 2 of 2

5. MM Proposition 2: McLaren Corp is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 8 and a cost of equity of 12.5%. The company's stock is selling for $50. The firm decides to repurchase half its shares and substitute an equal value of debt (issue debt and use the proceeds to buy back shares). The debt is riskOfree, with an interest rate of 5%. The company is exempt from corporate income taxes. Assuming MM are correct, calculate the following items after refinancing. a. The cost of equity. b. The overall cost of capital. c. The price-earnings ratio. d. The stock price. e. The stock's beta. 2 of 2

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Ch. 13. For questions 7, 8, and 9, use the following information: 7.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt? Format as a percentage and round to two places past the decimal point as "X.XX" 8.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7,…
Astromet is financed entirely by common stock and has a beta of 1.50. The firm pays no taxes. The stock has a price-earnings multiple of 14.0 and is priced to offer a 10.6% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt. Assume that the debt yields a risk-free 4.2%. Calculate the following: Required: a. The beta of the common stock after the refinancing b. The required return and risk premium on the common stock before the refinancing c. The required return and risk premium on the common stock after the refinancing d. The required return on the debt e. The required return on the company (i.e., stock and debt combined) after the refinancing If EBIT remains constant: f. What is the percentage increase in earnings per share after the refinancing? g-1. What is the new price-earnings multiple? g-2. Has anything happened to the stock price? Complete this question by entering your answers in the tabs below. Req A to E Req F to G2…
A firm has 30% debt and 70% equity in its capital structure. The firm's stock has a current beta of 1.3. The risk free rate is 5% and the market risk premium is 6%. The interest rate on the firm's debt is 8%. The marginal tax rate is 35%. The stock does not pay a dividend. What is the firm's unlevered cost of equity? Question 4 options: a) 11.1% b) 6.0% c) 10.5% d) 12.8%
3. Toran plc. is an all-equity financed firm and generates earnings of £200 per year. Its current required rate of return on equity is 10% per annum. It is planning to issue corporate debt at a rate of 8% to achieve a debt-equity ratio of 50%. Toran plc. Assume that debt and earnings are perpetuities. What happens to the firm value after the debt issuance? Assume there are perfect capital markets. 100 0 200 0 250 0 400 0 450 0
29. Mackenzie Company has a price of $36 and will issue a dividend of $2.00 next year. It has a beta of1.2, the risk-free rate is 5.5%, and the market risk premium is estimated to be 5.0%. a. Estimate the equity cost of capital for Mackenzie. What ___% b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? What __% **round to two decimal places**
A1. Payout policy (Answer all parts of this question.) (a) , What is the main theorem of Modigliani and Miller regarding the payout policy of firms? Explain. 1 (b) List four assumptions that must hold for the Modigliani-Miller theorem to be valid. (c) Consider a company that has 100 million shares outstanding. The market value of the company is currently at GBP 5 billion. Last year, the company paid out an annual dividend of GBP 2 per share. This year, the company intends to double the dividend to shareholders, but since the company has not enough cash, the company intends to raise the additional money required to pay the dividend in rights issue. i. ( If the price of a new share offered is GBP 25, what is the fair value of a right to buy a new share? Hint: The company first pays the dividends, and then raises the capital. ii. ( ) Contrary to theory, however, as soon as the company announces the rights issue, the share price drops. Why? Think of a reason why this transaction, i.e.,…
which option is correct
QUESTION 3 Discuss the meaning of "the present value of a future amount"? Give the general equation for present value? a. Farizal intends to buy a new car, the Myvi for RM57,650, but only has RM20,000 in cash. How many years will it take for RM20,000 to grow to RM57,650 if it is invested at 10% interest compounded annually? b. Wahida has decided to invest RM1,000 for two years in a savings account paying 6% interest compounded semi-annually. Compute the future value of Wahida's investment? C. d. Sharifah Aminah receives a mixed stream of cash flows from an investment over the next five years: Year Cash Flow (RM) 5,000 6,500 4,500 5,200 5,800 1 What is the initial amount that Sharifah Aminah should invest if the required return is 10%? 2345
Covan, Inc. is expected to have the following free cash flow: a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 11%, what should be its stock price? b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year 2, what is its expected price? c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year 2? a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 11%, what should be its stock price? The stock price should be $ (Round to the nearest cent.) A b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year 2, what is its expected price? If you plan to sell Covan at the beginning of year 2, its price should be $ (Round to the nearest cont.) c. Assume you bought Covan stock at the beginning of…

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