Ketchup Corporation is currently trading at $35 per share. There are 8 million shares outstanding, and the company has no debt. You believe that the value of the company would increase by 30% management were replaced. How much would you gain from acquiring 60% of the Ketchup's shares by getting a 1-year 10%-interest loan? Hint: you are not using your own money. The money for from the loan Mutiple Choice $84,000,000 $50,400,000 $33,000,000 10.

Ketchup Corporation is currently trading at $35 per share. There are 8 million shares outstanding, and the company has no debt. You believe that the value of the company would increase by 30% management were replaced. How much would you gain from acquiring 60% of the Ketchup's shares by getting a 1-year 10%-interest loan? Hint: you are not using your own money. The money for from the loan Mutiple Choice $84,000,000 $50,400,000 $33,000,000 10.

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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Organica Ltd. generates $350,000 cash flow each year. The cost of equity capital is 18% and the company has no debt outstanding. Organica would like to buy back $ 950,000 of its equity by borrowing the same amount at 12% per year. Assume that the debt will continue for an indefinite period and Modigliani and Miller proposition 1 holds, what is the cost of equity capital after the change in capital structure?
Atlantis REIT expects an income of $46 per share. This includes a deduction of $40 per share for depreciation. Atlantis did not have any gains from the sale of real estate. Its properties are mainly apartments, and you believe that apartments are currently selling on average at about an 8 percent cap rate. Atlantis has 1 million shares outstanding and its balance sheet shows liabilities of $192 million. Comparable REITs have FFO multiples of about 10. Atlantis is expected to pay a dividend during the next fiscal year of $6 per share and to increase those dividends at about 2 percent per year in the future. Investors in REITs like Atlantis usually expect a return of about 12 percent. Required: a. What is the FFO and value per share based on an FFO multiple? b. What value per share is indicated using a dividend discount model? c. What is the value per share implied by the net asset value of the properties?
Fujita, Incorporated, has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $42,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $100,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for this problem. a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded…
) Your firm has the following structure: you own all the shares of the Dixit paper cup company. Dixit has $2,000,000 of outstanding perpetual debt with a 10% coupon selling at par. Dixit is currently selling paper cups which produce earnings before interest of $210,000 per year. You receive the following offer from your engineer friend. He would help you liquidate Dixit’s assets and with the proceeds you could build solar powered scooters. Your financing would remain the same. You believe that there is a 75% chance that solar powered scooters would not be particularly successful. In this case they would generate only $100/year. However, there is a 25% chance that solar powered scooters would be very successful. In this case they would generate $500,000 per year. Assume your equity discount rate is 15%. Assume the firm pays no taxes. b) What is the value of the solar powered scooters investment assuming a 15% discount rate? c) What is the value of your equity under each of these…
The price of Landscapes Inc. is now $85. The company pays no dividends. Troy Compton expects the price four years from now to be $125 a share. Should Troy buy Landscapes if he wants a 15 percent rate of return? Explain.
Duke Inc. is considering to change its capital structure of a $1 million:$3 million debt-equity mix (in terms of market values), by taking out a $3 million loan which is used to pay a large dividend to shareholders. The firm’s tax rate is 40%. After the dividend has been paid, what will be the firm’s total equity value?
Andy has borrowed $370,000 on margin to buy Lowe`s Companies Inc., which is now trading at $203 per share. With this transaction, his initial percentage margin is 35%. His broker, Shannon, states, and Andy agrees, that the maintenance margin is 25%. Based on the given information, what is the equity value in account? A. $108,301 B. $147,621 C. $199,231 D. $232,650
River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $300,000 of debt at an interest rate of 12% and use the proceeds to repurchase 30,000 shares at $10 per share. Profits before interest are expected to be $130,000. What is the ratio of price to expected earnings for River Cruises before it borrows the $300,000? What is the ratio after it borrow?
Please help
Covan, Inc. is expected to have the following free cash flow: a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 11%, what should be its stock price? b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year 2, what is its expected price? c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year 2? a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 11%, what should be its stock price? The stock price should be $ (Round to the nearest cent.) A b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year 2, what is its expected price? If you plan to sell Covan at the beginning of year 2, its price should be $ (Round to the nearest cont.) c. Assume you bought Covan stock at the beginning of…
Save CH River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $170,000 of debt at an interest rate of 10% and use the proceeds to repurchase 17,000 shares at $10 per share. Profits before interest are expected to be $117,000. a. What is the ratio of price to expected earnings for River Cruises before it borrows the $170,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price-earnings ratio b. What is the ratio after it borrows? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price-earnings ratio to search.

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