Let's go back to the Double-R Nutting Company. Suppose that Double-R's bonds have a face value of $64. Its current market-value balance sheet is: Book-Value Balance Sheet Assets Net working capital $ 90 Liabilities and Equity Bonds outstanding Fixed assets 80 Common stock $ 95 75 Total assets $ 170 Total liabilities and shareholders' equity $ 170 Who would gain or lose from the following maneuvers? a. Double-R pays a $80 cash dividend. b. Double-R halts operations, sells its fixed assets for $20, and converts net working capital into $90 cash. It invests its $110 in Treasury bills. c. Double-R encounters an investment opportunity requiring a $80 initial investment with NPV = $0. It borrows $80 to finance the project by issuing more bonds with the same security, seniority, and so on, as the existing bonds. d. Double-R finances the investment opportunity in part (c) by issuing more common stock. Stockholders a. b. C. d. Bondholders

Let's go back to the Double-R Nutting Company. Suppose that Double-R's bonds have a face value of $64. Its current market-value balance sheet is: Book-Value Balance Sheet Assets Net working capital $ 90 Liabilities and Equity Bonds outstanding Fixed assets 80 Common stock $ 95 75 Total assets $ 170 Total liabilities and shareholders' equity $ 170 Who would gain or lose from the following maneuvers? a. Double-R pays a $80 cash dividend. b. Double-R halts operations, sells its fixed assets for $20, and converts net working capital into $90 cash. It invests its $110 in Treasury bills. c. Double-R encounters an investment opportunity requiring a $80 initial investment with NPV = $0. It borrows $80 to finance the project by issuing more bonds with the same security, seniority, and so on, as the existing bonds. d. Double-R finances the investment opportunity in part (c) by issuing more common stock. Stockholders a. b. C. d. Bondholders

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

8th Edition

ISBN:9781285065137

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter10: The Cost Of Capital

Section: Chapter Questions

Problem 3DQ: Next, we need to calculate MMMs cost of debt. We can use different approaches to estimate it One...

See similar textbooks

Similar questions

Using the previous information, correctly match each curve on the graph to it's corresponding issuing company. (Hint: Each curve indicates the path that each bond's price, or value, is expected to follow.) Curve A Curve B Curve C Based on the preceding information, which of the following statements are true? Check all that apply. O Johnson Incorporated's bonds have the highest expected total return. O The bonds have the same expected total return. O The expected capital gains yield for Smith, LLC's bonds is negative. O The expected capital gains yield for Smith, LLC's bonds is greater than 12%. Irwin Corporation's bonds have exhibited a substantial trading volume in the past few years. Its bonds would be referred to as a
Bond valuation related problems should be solved by using a financial calculator or MS excel spreadsheet. Accordingly, you must show the values of all relevant time valu of money variables In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet (book values) as of today is as follows: Long-term debt (bonds, at par) 23,500,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $39,500,000 The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm's debt (hint: bond price* numer of bond shares)?
5. Imagine there are two risky assets and the risk-free asset of the US bond in the table below. Suppose all the assumptions of the Capital Asset Pricing Model (CAPM) are satisfied. Then answer the following questions. Shares Outstanding Relative Shares Rate of Standard Security In market Price Deviation returns Jazz Inc. 10,000 1/6 $4.50 12% 6% Classical, Inc. 20,000 1/3 $6.75 8% 2% US bonds 30,000 1/2 $2.40 6% [8] Total 60,000 1 [D2]: Explain the assumptions of the CAPM in three lines.
Andyco, Inc., has the following balance sheet, WACC calculation? 1 and an equity market-to-book ratio of 1.7. Assuming the market value of debt equals its book value, what weights should it use for its The weight of debt for the WACC calculation is %. (Round to two decimal places.) The weight of equity for the WACC calculation is%. (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Liabilities & Equity Assets $1,020 Print Debt Equity Done $410 $610 — X
I need help with question 1
In the Merton model of corporate equity which is based on the Black Scholes formula, what is the quantity (S0/KT)? Assume that interest rates are zero (r=0) so the time value of money can be ignored, therefore S0 = ST. (a) Debt-to-equity ratio. (b) Debt-to-assets ratio. (c) Assets-to-debt ratio. (d) Assets-to-equity ratio. (e) Equity-to-assets rati
What is the answer for M19?
You have the following initial information on Financeur Co. on which to base your calculationsand discussion for questions 1) and 2): Note: I need help with Question 2 ONLY, I have completed question 1.• Current long-term and target debt-equity ratio (D:E) = 1:3• Corporate tax rate (TC) = 30%• Expected Inflation = 1.55%• Equity beta (E) = 1.6345• Debt beta (D) = 0.15• Expected market premium (rM – rF) = 6.00%• Risk-free rate (rF) =2%1) The CEO of Financeur Co., for which you are CFO, has requested that you evaluate apotential investment in a new project. The proposed project requires an initial outlay of$7.26 billion. Once completed (1 year from initial outlay) it will provide a real net cashflow of $555 million in perpetuity following its completion. It has the same business riskas Financeur Co.’s existing activities and will be funded using the firm’s current target D:Eratio.2) Assume now a firm that is an existing customer of Financeur Co. is considering a buyoutof Financeur Co.…
The current ratio is O a solvency measure that indicates the margin of safety for bondholders O calculated by dividing current liabilities by current assets calculated by subtracting current liabilities from current assets O used to evaluate a company's liquidity and short-term debt-paying ability Question 19 On the statement of cash flows, a $9,000 gain on the sale of fixed assets would be O added to net income in converting the net income reported on the income statement to cash flows from operating activities O deducted from net income in converting the net income reported on the income statement to cash flows from operating activities O deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends O added to dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends
Assume Lavender Corporation has a market value of $4 billion of equity and a market value of $19.8 billion of debt. What are the weights in equity and debt that are used for calculating the WACC?
a)Calculate the equity (total asset –total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) b)Calculate the duration and convexity of the both asset and liability sides; c)If the interest rates go up by 1%, using the duration and convexity ruleto determine the net worth of the bank and the equity to asset ratio; d)In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise? e)Do you agree with the following statement? Explain why.“The information about a bond’s duration and convexity adjustment is sufficient to quantify interest rate risk exposure.” please can you answer part d and e
1. The leverage ratio is the proportion of debts that a bank has compared to its equity/capital. Please answer one that is most correct Select one: a. Debt to Equity = Total debt / Shareholders Equity. b. Debt to Capital = Total debt / Capital (debt+equity) c. There are different leverage ratios such as. Debt to Equity = Total debt / Shareholders Equity. Debt to Capital = Total debt / Capital (debt+equity) Debt to Assets = Total debt / Assets. 2. Which of the following amortization methods is most likely to evenly distribute the cost of an intangible asset over its useful life? Select one: a. Units-of-production method. b. Straight-line method. c. Double-declining balance method 3. What ratio is a cash and marketable securities based (it removes Inventory) ? Select one: a. Quick Ratio b. Current Ratio c. Dupont Analysis set of ratios 4. Which of the following is an appropriate method of computing free cash flow to the firm? Select one: a. Add operating cash flows to…