Pari Inc., an all-equity firm, has earnings before interest and taxes of $950,000 and an un-levered beta of .80. The firm has 200,000 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume M&M case I, with no taxes and no cost for the risk of default. All general M&M assumptions apply. a) What is the market value of the firm? (2 marks) b) What is the WACC for the firm. (1 mark) c) What is the market value of a share in the company and what is the EPS? (2 marks) d) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? (2 marks) e) What is the new cost of equity? (2 marks) f) According to CAPM, what is the new beta? (2 marks) g) What is the WACC? (2 marks) h) Explain what happens to the market value of the firm and the WACC if the firm increases its debt-to- equity ratio. (1 mark)

Pari Inc., an all-equity firm, has earnings before interest and taxes of $950,000 and an un-levered beta of .80. The firm has 200,000 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume M&M case I, with no taxes and no cost for the risk of default. All general M&M assumptions apply. a) What is the market value of the firm? (2 marks) b) What is the WACC for the firm. (1 mark) c) What is the market value of a share in the company and what is the EPS? (2 marks) d) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? (2 marks) e) What is the new cost of equity? (2 marks) f) According to CAPM, what is the new beta? (2 marks) g) What is the WACC? (2 marks) h) Explain what happens to the market value of the firm and the WACC if the firm increases its debt-to- equity ratio. (1 mark)

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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A company has a target debt-to-equity ratio 2/3. The firm has no preferred stock. The firm's bonds have a coupon rate of 9% and YMT of 8.5%, and the firm is subject to a 30% corporate tax rate. The firm has common stock with a beta of 1.41. The risk free rate on treasury bills is 4% and the expected market risk premium is 10%. What is the minimum after-tax rate of return that the company must earn on its investments?
If the stocks are less risky than bonds, then the risk premium on stock may be zero. Assuming that the risk-free interest rate is 2 percent, the growth rate of dividends is 1 percent and the current level of dividends is $70, use the dividend-discount model to compute the level of the S&P 500 that is warranted by the fundamentals. Compare the result to the current S&P 500 level of 4300, and explain one possible reason for the difference.
Steve's Specialties, Inc. paid its dividend yesterday, which as $3.00. The dividend has been growing at a rate of 0.035 and is expected to continue indefinitely at that rate. Steve's common stock is currently trading at 24.00 per share. The firms beta is 0.88. Treasuries (T-bills) are currently yielding 0.030, Average return on the market is 0.10. Using the DCF approcah, what is steves cost of retained earnings?
A firm has equity with market value $100 million and debt with market value at $70 million. The debt pays perpetual expected coupons of $3.5 million annually. The above numbers are prior to a stock buyback being announced. The firm uses some of its cash buyback stock on of $20 million. As a result of the fall in its cash, the expected coupon payment to debt reduce to $3.4 million (expected payments is the probability weighted future coupons, and the probability that in some future states of the world the firm would default has increased due to the the stock buyback). Also the rate of discount Rd for expected coupons paid to debt rises to 5.35%. Assume Modigliani-Miller is true (which also means there are no taxes). What will be the value of Equity after the stock buyback? (Do not include the $20 million that is paid to the Equity holders.)
Astromet is financed entirely by common stock and has a beta of 1.30. The firm pays no taxes. The stock has a price-earnings multiple of 12.0 and is priced to offer a 11.4% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt. Assume that the debt yields a risk-free 4.8%. Calculate the following: The following is known: Beta of common stock is 2.6 Required return (before refinancing) is 11.4% Risk Premium (before refinancing) is 6.6% Required return (after refinancing) is 18.0% Risk premium (after refiancing) is 13.2% Required return on the debt is 4.8% Required return on the company (i.e., stock and debt combined is 11.4% The following questions need to be answered (preferrably in Excel) If EBIT remains constant: f. What is the percentage increase in earnings per share after the refinancing? g-1. What is the new price-earnings multiple? g-2. Has anything happened to the stock price?
which option is correct
An all-equity firm has expected earnings of $14,200 and a market value of $82,271. The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after the repurchase?
YNWA Limited has asked you to calculate the return on its ordinary shares to help in its calculation of its weighted average cost of capital (WACC). YNWA has 2,000,000 ordinary shares on issue that have a beta of 1.79. The last dividend was $6.66. If the risk-free rate is 1.73% and the return on the market is 5.63%. What is the required return on one of YNWA's ordinary shares? Record your answer to the nearest four decimal places (e.g., if your answer is 3.40%, then report 0.0340).
The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. a. What is the required return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Estimate the company cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. What is the discount rate for an expansion of the company's present business? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged…

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