a. What is the market value of the new debt that must be issued? (Select the best choice below.) A. The market value of the 80 million shares Rosenzweig does not own is $80 million. B. The market value of the 80 million shares Rosenzweig does not own is $75 million. C. The market value of the 80 million shares Rosenzweig does not own is $100 million. D. The market value of the 80 million shares Rosenzweig does not own is $175 million. b. Suppose OpenStart had risk-free debt with a face value of $75 million. What would be the value of its debt and levered equity today? (S

a. What is the market value of the new debt that must be issued? (Select the best choice below.) A. The market value of the 80 million shares Rosenzweig does not own is $80 million. B. The market value of the 80 million shares Rosenzweig does not own is $75 million. C. The market value of the 80 million shares Rosenzweig does not own is $100 million. D. The market value of the 80 million shares Rosenzweig does not own is $175 million. b. Suppose OpenStart had risk-free debt with a face value of $75 million. What would be the value of its debt and levered equity today? (S

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

See similar textbooks

Similar questions

LNP is a company with a liability of $110 million,which is due in 10 years. The company’s lone asset is $70 million held in cash. The only assumption is that term structure of interest rates remains flat at 5%. (a) Determine the present value of the company’s liability. (b) Without any calculations,briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective. Two bonds, A and B, are currently trading. Bond A is a 3-year coupon bond with a face value of $100, selling for $113.616; coupons are paid annually. Bond B is a perpetuity with an initial cash flow of $1 in one year’s time, with cash flows growing thereafter at 1% per year. (c) Caluclate Bond A’s coupon rate and the pricing of Bond B.
Cede & Co can borrow at 11 percent. Cede currently has no debt, and the cost of equity is 12 percent. The current value of the firm is $664,000. The corporate tax rate is 30 percent. Required: What will the value be if Cede borrows $223,000 and uses the proceeds to repurchase shares?
Executive Chalk is financed solely by common stock and has outstanding 25 million shares with a market price of $10 a share. It now announces that it intends to issue $160 million of debt and to use the proceeds to buy back common stock. a. How is the market price of the stock affected by the announcement? b. How many shares can the company buy back with the $160 million of new debt that it issues? Note: Enter your answer in millions. c-1. What is the market value of the firm (equity plus debt) after the change in capital structure? Note: Enter your answer in millions. c-2. Did the market value of the firm change? d. What is the debt ratio after the change in structure? Note: Round your answer to 2 decimal places. e. Who (if anyone) gains or loses? a. Effect on market price b. Shares repurchased c-1. Market value c-2. Did the market value of the firm change? d. Debt ratio e. Who (if anyone) gains or loses? Stock price remains the same. 160 million 250 million $ No 1.78 No one gains or…
Kendall Corporation has no debt but can borrow at 6.5 percent. The firm’s WACC is currently 10 percent, and there is no corporate tax. What is the company’s cost of equity? Note: Do not round intermediate calculations and enter your answer as a percent rounded to the nearest whole number, e.g., 32. If the firm converts to 10 percent debt, what will its cost of equity be? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. If the firm converts to 45 percent debt, what will its cost of equity be? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What is the company’s WACC in parts (b) and (c)? Note: Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.
Assume that $500 million of Power’s long-term debt is due and the board of directors are meeting to discuss a proposed plan of retiring the $500 million of long-term debt and replace it with additional common stock. It is estimated that the issuance of additional stock will increase the market capitalization by $500 million. What would be the effect of these plans on Power’s Altman Z-score and its perceived risk of bankruptcy had the plan been executed just before the end of 2018? Discuss, and provide calculations to support your analysis.
Rally inc, is an all equity firm with assets worth $25B and 10B shares outstanding. Rally plans to borrow $10B and use funds to repurchase shares. Rally’s corporate tax rate is 35% and Rally plans to keep its outstanding debt equal to $10B permanently. Suppose Rally offers $3 per share, and shareholders tender their shares at this price. What will be Rally’s share price after the repurchase?
Suppose that a firm has 5 bondholders each expecting to be paid today their principal of $1 million each. The firm is in default, as its going-concern value is only $3 million, falling short of the $5 million to be repaid. The firm could liquidate and sell all of its assets for a value of $1 million, so that each bondholder would recover $200,000 on their claim. The firm offers its bondholders a debt-for-equity swap, but four of out the five bondholders must participate and become equityholders for the swap to succeed. In the table below, calculate the "lower bound" payoff if only four bondholders participate and the "upper bound" payoff if all five bondholders participate. The correct answer is lower bound=$500,000 and upper bound=$600,000
Ewing Corporation is evaluating an extra dividend versus a share repurchase. In either case, $10,000 would be spent. Current earnings are $3 per share, and the stock currently sells for $50 per share. There are 5,000 shares outstanding. Ignore taxes and other market imperfections (e.g. transaction cost) in answering the questions. a) Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth. b) What will be the effect on Ewing’s EPS and PE ratio under the two different scenarios?
Byrd Enterprises has no debt. Its current total value is $47.2 million. Assume the company sells $18.5 million in debt. Ignoring taxes, what is the debt-equity ratio? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Assume the company’s tax rate is 21 percent. What is the debt-equity ratio? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
Fields & Company expects its EBIT to be $107,000 every year forever. The company can borrow at 7 percent. The company currently has no debt and its cost of equity is 11 percent. The tax rate is 21 percent. The company borrows $162,000 and uses the proceeds to repurchase shares. a. What is the cost of equity after recapitalization? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of equity b. WACC % %
Hastings Corporation is interested in acquiring Vandell Corporation. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.3 million, $2.9 million, $3.4 million, and $3.79 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell’s $10.29 million in debt (which has a 7.4% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.6 million each year for Years 1, 2, and 3. After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.431 million, after which the interest and the tax shield will grow at 5%. Vandell currently has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.10 (i.e., based on its target capital structure). Vandell and Hastings each have a…
Amherst Corporation, an investment banking company, often has extra cash to invest. Suppose Amherst buys900 shares of Hurricane Corporation stock at $57 per share, representing less than 5% ofHurricane’s outstanding stock. Amherst expects to hold the Hurricane stock for one month andthen sell it. The purchase occurs on December 15, 2018. On December 31, the market price of ashare of Hurricane stock is $58 per share.Requirements1. What type of investment is this for Amherst? Give the reason for your answer.2. Record Amherst’s purchase of the Hurricane stock on December 15 and the adjustment tomarket value on December 31.3. Show how Amherst would report this investment on its balance sheet at December 31 andany gain or loss on its income statement for the year ended December 31, 2018.

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS