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. a. b. C. d. Stockholders 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. a. b. C. d. Stockholders 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...

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Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset Syr bond bought at a yield of 3.4% $55OM (lending money) 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $80OM 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability Zyr bond sold at a yield of 2.4% (borrowing money) 4yr bond sold at a yield of 2.8% (borrowing money) $300M 1.941 2.384 $500M 3.759 8.206 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 rule to determine the net worth of the bank and the equity to asset ratic d) Incys 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…
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(Individual or component costs of capital) You have just been hired to compute the cost of capital for debt, preferred stock, and common stock for the Mindflex Corporation. a. Cost of debt: Since Mindflex's bonds do not trade very frequently, you have decided to use 9.07 percent as your cost of debt, which is the yield to maturity on a portfolio of bonds with a similar credit rating and maturity as Mindflex's outstanding debt. In addition, Mindflex faces a corporate tax rate of 34 percent. b. Cost of common equity: Mindfiex's common stock paid a $1.21 dividend last year. In addition, Mindflex's dividends are growing at a rate of 5.3 percent per year and this growth rate is expected to continue into the foreseeable future. The price of this stock is currently $30.22 c. Cost of debt: Now let's assume that Mindflex's bands are frequently traded. A Mindflex bond has a $1,000 par value (face value) and a coupon interest rate of 12.6 percent that is paid semiannually. The bonds are currently…
Using the image attached: 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 rule to determine the networth 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 quantifyinterest rate risk exposure.
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