Question 1: a) Happy Ltd. expects its EBIT to be $100,000 every year forever. The firm can borrow at 11 %. Natsu currently has no debt, and its cost of equity is 18 %. The tax rate is 31 %. Natsu will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?b) Provide at least two circumstances, where interest tax-shield will have no value for a company.c) Your firm has a debt-equity ratio of 0.60. Your cost of equity is 11 % and your after-tax cost of debt is 7 %. What will your cost of equity be if the target capital structure becomes a 50/50 mix of debt and equity? Question 2:a) Mira Inc. is evaluating an extra dividend versus a share repurchase. In either case, $9,000 would be spent. Current earnings are $1.30 per share and the stock currently sells for $64 per share. There are 1,000 shares outstanding. In answering the questions that follow, ignore taxes for the first two: Evaluate the two choices in terms of their effect on the price per share of stock and shareholder wealth What will be the effect on Everystate’s EPS and P/E ratio under the two different scenarios? In the real world, which of these choices will you recommend? Why? b) At present, total dividends for each of the next two years are set equal to the cash flow of $10,000 per year. There are 100 shares outstanding, so the dividend per share is $100. The price per share at the moment is $173.55 and the required return of investors is 10%. There is an alternative choice of paying $11,000 total dividends in the first year ($110 per share), followed by a liquidating dividend of $8,900 ($89 per share) in the second. You prefer the first alternative but the firm’s management adopts the second alternative. You have 50 shares to begin with and if you choose to create homemade dividends, how many shares will you have at the end of the first year? Question 3 a) Assume that you can buy 250 Canadian dollars with 100 British pounds and you have 100 British pounds. The following exchange rates are available. Country U.S. $ Equivalent Currency per U.S. $ Canada ? 1.3500 U.K 1.8305 ? Complete the table above and compute how much profit, if at all, you can earn with triangle arbitrage? b) Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1925. The nominal risk-free rate in Canada is 3 % while it is 4 percent in the U.S. At what Canadian interest rate, there will be no possibility for profitable arbitrage?
Question 1:
a) Happy Ltd. expects its EBIT to be $100,000 every year forever. The firm can borrow at 11 %. Natsu currently has no debt, and its
b) Provide at least two circumstances, where interest tax-shield will have no value for a company.
c) Your firm has a debt-equity ratio of 0.60. Your cost of equity is 11 % and your after-tax cost of debt is 7 %. What will your cost of equity be if the target capital structure becomes a 50/50 mix of debt and equity?
Question 2:
a) Mira Inc. is evaluating an extra dividend versus a share repurchase. In either case, $9,000 would be spent. Current earnings are $1.30 per share and the stock currently sells for $64 per share. There are 1,000 shares outstanding. In answering the questions that follow, ignore taxes for the first two:
- Evaluate the two choices in terms of their effect on the price per share of stock and shareholder wealth
- What will be the effect on Everystate’s EPS and P/E ratio under the two different scenarios?
- In the real world, which of these choices will you recommend? Why?
b) At present, total dividends for each of the next two years are set equal to the
Question 3
a) Assume that you can buy 250 Canadian dollars with 100 British pounds and you have 100 British pounds. The following exchange rates are available.
| Country | U.S. $ Equivalent | Currency per U.S. $ |
| Canada | ? | 1.3500 |
| U.K | 1.8305 | ? |
Complete the table above and compute how much profit, if at all, you can earn with triangle arbitrage?
b) Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1925. The nominal risk-free rate in Canada is 3 % while it is 4 percent in the U.S. At what Canadian interest rate, there will be no possibility for profitable arbitrage?
Step by step
Solved in 2 steps with 1 images
