Imagine a firm with one period of operations. In case of a strong economy, the FCF from operations at year 1 will be $2,800. In case of a weak economy, the FCF at year 1 will be $1,800. Both scenarios are equally likely to happen. The risk-free rate is 3% and the equity risk premium is 12% per year. Under these circumstances, if the cost of levered equity is 28%, how much debt financing does the firm use?

Imagine a firm with one period of operations. In case of a strong economy, the FCF from operations at year 1 will be $2,800. In case of a weak economy, the FCF at year 1 will be $1,800. Both scenarios are equally likely to happen. The risk-free rate is 3% and the equity risk premium is 12% per year. Under these circumstances, if the cost of levered equity is 28%, how much debt financing does the firm use?

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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You have the following cash flows for the firm; What is NPV, if discount rate is 10% ? CF0 = -477 (CF0 is always negative. It is your initial investment) CF1 = 710 CF2 = 699 CF3 = 752 CF4 = 734 CF5 = 937
You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.5, a debt-to-equity ratio of .4, and a tax rate of 21 percent. Assume a risk-free rate of 5 percent and a market risk premium of 7 percent. Lauryn's Doll Co. had EBIT last year of $46 million, which is net of a depreciation expense of $4.6 million. In addition, Lauryn's made $6.25 million in capital expenditures and increased net working capital by $3.6 million. Assume the FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Firm value million
A firm wants to fund a $7 million project by raising both short-term and long-term debt. Because short-term debt is less risky, its cost is 5%. The long-term debt (bond) must pay 5.5% annual coupons. If the firm raises $5 million in short-term debt and the remainder in long-term debt, what is this project's WACC? Assume the tax rate = 26%. a. 5.14% b. 3.81% c. 3.89% d. 5.25% e. 1.34%
You have the following cash flows for the firm; What is NPV, if discount rate is 10% ? CF0 = -433 (CF0 is always negative. It is your initial investment) CF1 = 969 CF2 = 697 CF3 = 824 CF4 = 727 CF5 = 922
8)Glassmakers has the below characteristics. The premerger debt is $5, the premerger equity is $10. The risk free rate is 6%. The premerger beta is 1.36. The tax rate is 40%. The cost of debt premerger is 11%. The expected market rate of return is 10%. What discount rate should you use to discount Glassmakers' free cash flows and interest tax savings? 10.01% 10.06% 11.29% 11.44% 13.49%
You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.4, a debt-to-equity ratio of .4, and a tax rate of 21 percent. Assume a risk-free rate of 4 percent and a market risk premium of 8 percent. Lauryn's Doll Co. had EBIT last year of $41 million, which is net of a depreciation expense of $4.1 million. In addition, Lauryn's made $4 million in capital expenditures and increased net working capital by $2.0 million. Assume the FCF is expected to grow at a rate of 2 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) X Answer is complete but not entirely correct. Firm value $ 310.99 X million
The value of a firm's future cash flows is estimated at 230M. The continuously compounded risk-free rate is 3%. The duration of firm's debt is 11 years. The face value of the firm's debt is 280M. The volatility of firm cash flows is 0.22. The firm pays no dividends. Use the notion of equity as a call option on the value of the firm. Let the firm now accept a project that has an NPV of -10M and increases the volatility of the firm to 0.30. What is the new value of the firm's equity?
A firm's financial managers are evaluating two potential investments with a cost of $10,000 each. They forecast returns of $3,000 per year for 5 years for Investment A and $4,000 per year for 5 years for Investment B. The returns are more uncertain for B than for A. Which of the following is true? Investment A is better than B according to shareholder wealth maximization criterion. Investment B is better than A according to shareholder wealth maximization criterion. Investment A is better than B according to the profit maximization criterion. Investment B is better than A according to the profit maximization criterion.
The total in rate sensitive assets for a financial institution is $120 million and the total in rate sensitive liabilities is $95 million. What is the cumulative pricing gap (CGAP) and what is the interest rate sensitivity gap ratio if total assets equals $195 million? What would the projected change to net income be if interest rates rose by 2% on both assets and liabilities? What would the projected change to net income be if interest rates declined by 2% on both assets and liabilities? What would the projected change to net income be if interest rates rose by 1.8% on assets and 1.5% on liabilities? What would the projected change to net income be if interest rates declined by 1.8% on assets and 1.5% on liabilities?
Given the following information regarding Bank XYZ: DA = 3 years, DL = 5 years, A = $100 million, E = $10 million, we have a flat yield curve that is expected to fall from 8 to 7% in the next 6 months. Answer the following three questions related to this information: Which of the following statements is true? Select the correct answer: 1.- Assets increase from $100,000,000 to $104,629,630 (rounded) 2.- Assets decrease from $100,000,000 to $97,222,222 (rounded) 3.- Liabilities (“Liabilities”) increase from $90,000,000 to $94,166,667 (rounded) 4.- Liabilities (“Liabilities”) decreased from $90,000,000 to $85,833,333 (rounded)

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