Golden's is merging with Rosa's. Golden's has debt with a face value of $80 and Rosa's has debt with a face value of $50. The premerger values of the firms given two economic states with equal probabilities ofoccurrence are as follows:Premerger Values:Golden'sAssetsDebtEquityRosa'sAssetsDebtEquityStage 1$ 1308050$30300Stage 2$ 50500$905040MarketValue$906525$ 604020If the merger provides no synergy, and if Rosa's stockholders receive stock in the combined firm in an amount equal to the standalone value of Rosa's, what will be the combined gain or loss to the bondholders ofthese two firms?

To find the combined gain or loss to the bondholders of Golden's and Rosa's after their merger,…

Answered: Golden's is rging with Rosa s. Golden's…

Golden's is rging with Rosa s. Golden's has debt with face value occurrence are as follows: $80 and Rosas has debt with a face The premerger values of the firms given two economic states with equal

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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Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £60m of debt on which it pays a 5% interest rate. Assume no transaction costs, no taxes and risk-free debt. The relevant numbers are provided in the following table (in £ m): A B Value of Firm 100 120 Debt 60 Equity 100 60 Projected earnings before interest 12 12 Interest payment Not Interest rate Applicable 5% Please answer the following questions a) "The situation described in the table is consistent with the absence of arbitrage opportunities". True or False (T/F)? b) Which one of the two firms is relatively overvalued (A/B)? c) "B's shares carry more risk than A's shares". True or False (T/F)? d) What is the return to an investor holding a 10% stake in B (in £ '000)? e) Consider an investor who wants to purchase a 20% stake in A. If he wished to replicate B's capital structure through homemade leverage, how much would he need to borrow to finance his position in £m? ) What is the…
Which of the following choices best describes reasonable conclusions that you might make about the two companies’ ability to pay their current and long-term obligations? A. Company A’s current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, and Company A is also more solvent, as indicated by a debt-to-equity ratio of 200 percent compared with Company B’s debt-to-equity ratio of only 30 percent. B. Company A’s current ratio of 0.25 indicates it is less liquid than Company B, whose current ratio is 0.83, and Company A is also less solvent, as indicated by a debt-to-equity ratio of 200 percent compared with Company B’s debt-to-equity ratio of only 30 percent. C. Company A’s current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, but Company B is more solvent, as indicated by its lower debt-to- equity ratio.
Assume that Firms U and L are in the same risk class and that both have EBIT=$500,000. Firm U uses no debt financing, and its cost of equity is rsU=14%. Firm L has $1 million of debt outstanding at a cost of rd=8%. There are no taxes. Assume that the MM assumptions hold. Graph (a) the relationships between capital costs and leverage as measured by D/V and (b) the relationship between V and D. Now assume that Firms L and U are both subject to a 40% corporate tax rate. Using the data given in Part b, repeat the analysis called for in b(1) and b(2) using assumptions from the MM model with taxes.
(Following Rates are Quoted) Company A Company B Credit Rating A B Fixed Rate 6% 8% Floating Rate LIBOR+1% LIBOR+1.5% Which company has a relative advantage and in which market? Which company has an absolute advantage and in which market Company A wants to borrow floating. Company B wants to borrow fix. Build a proper SWAP that benefit the two companies.
Dallas Company's current ratio is 4 to 3. The company is negotiating a loan, and the company's management understands that a higher (i.e., better) current ratio will reduce the company's cost of borrowing (interest rate). Which of the following transactions will improve Houston Company's current ratio? Select one: a. making a payment on a long-term debt b. using cash to pay current liabilities c. purchasing inventory on account d. collecting on some of the company's accounts receivable e. none of the above
Please show proper steps thanks. All parts.
Suppose XYZ Bank reports interest-sensitive assets of $670 million and interest-sensitive liabilities of $875 million. What is the bank’s dollar interest-sensitive gap? Its relative interest-sensitive gap and interest-sensitivity ratio?
ings Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £60m of debt on which it pays a 5% interest rate. Assume no transaction costs, no taxes and risk-free debt. The relevant numbers are provided in the following table (in £ m): A Value of Firm 100 120 Debt 60 Equity 100 60 Projected earnings before interest 12 12 Interest payment Not Interest rate 5% Applicable Please fill in the following statements a) A's return on equity is equal to b) B's return on equity is equal to C) A's weighted average cost of capital is equal to Shot on vivoZverage cost of capital is equal to WIDE Vivo Al camera Please answer the following questions
If the cost of debt after tax for Sohar Textiles is 0.198 and its tax rate is 0.248 then what is the cost of debt? Select one: a. 0.1587 b. 0.1489 c. None of the options d. 0.2633 e. 0.2471
Calculate the aftertax cost of debt under each of the following conditions. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) raw C. Yield 8.0% 8.6 % 6.5 % Corporate Tax Rate 22 % 25 % Aftertax Cost of Debt % % %
Boss ltd does not have ay debt. its weignted average cost of capital (WACC) is 9%. Suppose, Boss converts to a debt-equity ratio of 0.5. The interest rate on the debt is 6%. ingoring taxes, what is Boss's newcost of equity? What is its new WACC?

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