7. An all-equity firm has 100 million shares outstanding and $100 million in cash. The firmexpects future free cash flows of $100 million per year. Management plans to use the $100million cash to expand the firm's operations, which will in turn increase future free cashflows by 30%. If the cost of capital of the firm is 20%, and the expansion does not changethe firm's cost of capital, how would a decision to use the cash for a share repurchase insteadof the expansion change the share price?A) Share price will increase by $1.50 per shareB) Share price will decrease by $1.50 per shareC) Share price will increase by $0.50 per shareD) Share price will decrease by $0.50 per shareE) Share price will remain unchanged

Share price refers to the amount that is paid by the investor for purchasing one share from the…

Answered: 7. An all-equity firm has 100 million…

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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clacher plc and Holmes plc are two firms with identical prospects regarding their future cash flows. The cash flows are expected to remain constant forever into the future. The market assesses the prospects of the two companies and believes that there is a 30% probability that the cash flow will be £20,000 and a 70% probability it will be £40,000. The firms are the same in all respects except for their capital structures. Clacher is entirely financed by equity capital, while Holmes has perpetual riskless debt outstanding with an annual interest payment of £6,000. Clacher’s equity is valued at £200,000. The risk-free rate of return in the economy is 10%. There is no taxation, and there are no agency costs or bankruptcy costs. Assume that both firms are correctly priced by financial markets in accordance with the Modigliani and Miller theorem. What is the expected rate of return on equity for the two firms?
38. You have forecast the free cash flows to the firm for Permelac Inc., a young and growing company, for the next ten years. You estimate that the cash flows will be negative for the first six years and that you will have to issue 25 million new shares (your estimate) to cover these cash flow needs. You have computed the present value of all of the cash flows, including the terminal value, to be $1.5 billion and you have 100 million shares outstanding today. What is the value per share today? a. $12/share b. $15/share c. $20/share d. $25/share
Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.52, expects to generate free cash flow of $49 million this year, and anticipates a 4% perpetual growth rate. The industrial chemicals division has an asset beta of 1.09, expects to generate free cash flow of $74 million this year, and anticipates a 3% perpetual growth rate. Suppose the risk-free rate is 2% and the market risk premium is 5%. a. Estimate the value of each division. b. Estimate Weston's current equity beta c. Estimate Weston's current cost of capital. Is this cost of capital useful for valuing Weston's projects? How is Weston's equity beta likely to change over time? *** a. Estimate the value of each division. The cost of capital for the soft drink division is%. (Round to two decimal places.)
clacher plc and Holmes plc are two firms with identical prospects regarding their future cash flows. The cash flows are expected to remain constant forever into the future. The market assesses the prospects of the two companies and believes that there is a 30% probability that the cash flow will be £20,000 and a 70% probability it will be £40,000. The firms are the same in all respects except for their capital structures. Clacher is entirely financed by equity capital, while Holmes has perpetual riskless debt outstanding with an annual interest payment of £6,000. Clacher’s equity is valued at £200,000. The risk-free rate of return in the economy is 10%. There is no taxation, and there are no agency costs or bankruptcy costs.Discuss the view that capital structure is irrelevant to firm value.
Rolex, Inc. has equity with a market value of $20 million and debt with a market value of $10 million. Assume the firm has no default risk and can borrow at the risk-free interest rate. The risk-free interest rate is 5 percent per year, and the expected return on the market portfolio is 11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost of capital for an otherwise identical all-equity firm?
A company is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 6%; the market risk premium, RPM, is 6%; and the firm's tax rate is 40%. Currently, the company’s cost of equity is 14%, which is determined by the CAPM. What would be the companies estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Round your answer to two decimal places. Do not round intermediate steps.
Globo-Chem Co. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 10%, and it will face a tax rate of 25%. What will Globo-Chem Co.'s beta be if it decides to make this change in its capital structure? 1.82 Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 10%, and its tax rate is 25%. It currently has a levered beta of 1.15. The risk-free rate is 2.5%, and the risk premium on the market is 7.5%. US Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase to 12%. First, solve for US Robotics Inc.'s unlevered beta. Use US Robotics Inc.'s unlevered beta to solve for the firm's levered beta with the new capital structure. Use US Robotics Inc.'s levered beta under…
a firm has an asset base with a market value of 5.3 million. ITs debt is worth 2.5 million. if 0.2 million is paid in interest annually and the shareholders expect a 16% annual return, what is the weighted average cost of capital assuming no corporate taxes? what is the WACC if corporate taxes are 45%?
31. CAPM and Valuation. You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow -100 1-10 +15 On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.4. Assuming that the rate of return available on risk-free investments is 4% and that the expected rate of return on the market portfolio is 12%, what is the net present value of the project? (LO12-3)
Suppose Alcatel-Lucent has an equity cost of capital of 9.1%, market capitalization of $10.36 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 5.5%, its marginal tax rate is 34%, the WACC is 7.68%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year 1 2 FCFE ($ million) 0 3 Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 1 FCF ($ million) D=dxV² 45 39.60 Interest 2.62 0 - 100 47.64 0.00 Print Done 2 99…

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