Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share for the Knight Corporationwill be $3 with or without the merger. However, the standard deviation of the earnings will go from $2.55 to $1.95 with the mergerbecause the two firms are negatively correlated.a. Compute the coefficient of variation for the Knight Corporation before and after the merger. (Do not round intermediatecalculations and round your answers to 2 decimal places.)Pre-mergerPost-mergerCoefficient ofVariationb. Comment on the possible impact on Knight's postmerger P/E ratio, assuming investors are risk-averse.Risk-averse investors are being offeredrisk and may assign aP/E ratio to postmerger earnings.

The coefficient of variation shows the relationship between the standard deviation to its mean. The…

Answered: Assume the Knight Corporation is…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend and buy one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share) and sell the shares for $36.45 each. The dollar- weighted return on your investment is Answers: А. -1.75%. B. 8.00%. C. 4.08%. D. 8.53%. Е. 12.35%.
Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $35. At the end of year 1, you receive a $3 dividend, and buy one more share for $44. At the end of year 2, you receive total dividends of $6 (i.e., $3 for each share), and sell the shares for $50 each. The time-weighted return on your investment is? When performing the calculations, do not round any inputs or interim results until you get the final answer. Round your final answer to four places after the decimal point. The dollar-weighted return on your investment is? When performing the calculations, do not round any inputs or interim results until you get the final answer. Round your final answer to four places after the decimal point.
Hassinah, Incorporated, is proposing a rights offering. Presently, there are 800,000 shares outstanding at $48 each. There will be 160,000 new shares offered at $40 each. a. What is the new market value of the company? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. How many rights are associated with one of the new shares? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) c. What is the ex-rights price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d. What is the value of a right? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. New market value b. Number of rights needed c. Ex-rights price d. Value of a right
Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share. How many of the old shares must be given up for one new share to achieve the ... In recent years Constable Inc. has suffered losses, and its stock currently sells for only $0.50 per share.
In you cash account, you buy 100 shares of XYZ Corporation at a price of $10 per share. Two months later, XYZ pays a dividend $0.21 per share. You sell all 100 shares of XYZ three months later at a price of $12 per share. If you wanted to lever up the returns of this trade, you could have executed it in your _____ account. A) cash B) margin C) brokerage D) bank
True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will reduce the cost of new common stock. False: Flotation costs are additional costs associated with raising new common stock. True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation cost-similar to how the after-tax cost of debt is calculated Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $475,000. To do so, it will have issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $550,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is (rounded to two decimal places) Sunny Day Manufacturing Company has a current stock price of…
An insurance company’s projected loss ratio is 79.53 percent, and its loss adjustment expense ratio is 7.51 percent. It estimates that commission payments and dividends to policyholders will add another 13.96 percent. What is the minimum yield on investments required in order to maintain a positive operating ratio? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))
You've collected the following information about Groot, Inc.: Profit margin Total asset turnover Total debt ratio Payout ratio = 4.44% = 3.50 = .25 = 29% a. What is the sustainable growth rate for the company? (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 ROA? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Sustainable growth rate b. ROA % 15.54 %
Suppose that a bank purchased 15 million shares of Company E. The shares are bid $34.2 and offer $35.4. The mean and standard deviation of the bid-ask spread are 0.034483 and 0.054, respectively. What is the cost of liquidation that we are 99% confident will not be exceeded (i.e., in a stressed market condition)? O 2.402 O 0.259 O 1.201
There are only shares of A and B companies in the market. Currently, the market value of A and B shares is $200 million and $300 million, respectively. In addition, the risk-free interest rate (Rf) is 5 per cent. The probability and rate of return for the future state of the two entities are given as follows: (Value values with a decimal place or higher to the fifth decimal place.) 1) Obtain the expected return and variance of Entity A and B, respectively. 2) When forming a market portfolio with two shares, obtain the expected return rate and variance and standard deviation of the market portfolio. 3) Calculate the beta of share A, and calculate the required yield of share A. state probability Ra Rb 1 0.3 0.30 0.20 2 0.4 0.15 -0.10 3 0.3 0.05 0.10
When an acquirer assesses a potential target, the price the acquirer is willing to pay should be based on the value of: The target firm’s total corporate value (debt and equity) The target firm’s equity The target firm’s debt Consider the following scenario: Ziffy Corp. is considering an acquisition of Keedsler Motors Co., and estimates that acquiring Keedsler will result in incremental after-tax net cash flows in years 1–3 of $14.00 million, $21.00 million, and $25.20 million, respectively. After the first three years, the incremental cash flows contributed by the Keedsler acquisition are expected to grow at a constant rate of 6% per year. Ziffy’s current beta is 1.60, but its post-merger beta is expected to be 2.08. The risk-free rate is 5%, and the market risk premium is 7.10%. Based on this information, complete the following table by selecting the appropriate values (Note: Do not round intermediate calculations, but round your answers to two decimal places): Value…
4. Merger analysis - Adjusted present value (APV) approach Wizard Inc., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $14.0 $16.8 $21.0 Interest expense 3.0 3.3 3.6 Debt 33.0 39.0 42.0 Total net operating capital 113.3 115.5 117.7 Global Satellite Corp. (GSC) is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements: • GSC currently has a $28.00 million market value of equity and $18.20 million in debt. • The risk-free rate is 5%, there is a 7.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity SL of 12.10%. •…

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