In year 1, AMC will earn $2,900 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 45%. Right now, the firm has $7,250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.7% per year. Suppose the risk-free rate equals 4.5%, and the expected return on the market equals 9.9%. The asset beta for this industry is 1.93. a. If AMC were an all-equity (unlevered) firm, what would its market value be? (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.) b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 2.7% per year, at what rate are its interest payments expected to grow? (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.) c. Even though AMC's debt is riskless (the firm will not default), the future growth of AMC's debt is uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as AMC's assets, what is the present value of AMC's interest tax shield? (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.) d. Using the APV method, what is AMC's total market value, VL? What is the market value of AMC's equity? (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.)
Macrohedging
Hedging or hedge accounting is a risk-mitigation technique used to protect the current financial position from potential losses. Hedging is often confused with speculating. The major difference between the two is that hedging does not involve guessing, whereas speculation is based on guessing the direction of movement of the underlying asset to book profits.
Finance Mathematics
The area of applied mathematics known as mathematical finance, also known as quantitative finance or financial mathematics is concerned with the mathematical modeling of financial markets. The application of mathematical methods to financial problems is known as financial mathematics. A financial market is a place where people can exchange low-cost financial securities and derivatives. Stocks and bonds, raw materials, and precious metals, both of which are regarded as commodities in the stock markets, are examples of securities. It uses probability, statistics, stochastic processes, and economic theory as methods.
In year 1, AMC will earn $2,900 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal
a. If AMC were an all-equity (unlevered) firm, what would its market value be? (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.)
b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 2.7% per year, at what rate are its interest payments expected to grow? (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.)
c. Even though AMC's debt is riskless (the firm will not default), the future growth of AMC's debt is uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as AMC's assets, what is the
d. Using the APV method, what is AMC's total market value, VL? What is the market value of AMC's equity? (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.)
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