You have purchased 1 million shares in a restaurant chain venture. At this zero-stage investment, your company's assets are $130,000 plus the idea for your new product Suppose that when you first approach your friendly VC, he decides that your shares are worth only $0.55 each. a. How many shares will you need to sell to raise the additional $704,000? Note: Enter your answer in whole numbers, not in millions. b. What fraction of the firm will you own after the VC investment? Note: Enter your answer as a percent rounded to 1 decimal place. Shares b. Percentage of shares owned

You have purchased 1 million shares in a restaurant chain venture. At this zero-stage investment, your company's assets are $130,000 plus the idea for your new product Suppose that when you first approach your friendly VC, he decides that your shares are worth only $0.55 each. a. How many shares will you need to sell to raise the additional $704,000? Note: Enter your answer in whole numbers, not in millions. b. What fraction of the firm will you own after the VC investment? Note: Enter your answer as a percent rounded to 1 decimal place. Shares b. Percentage of shares owned

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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2. An analyst for Acme, R. Runner, has recommended that Peter the Anteater purchase shares in a private firm (a firm that is not traded on any exchange) called Dynamite Corp. Dynamite has 30% debt and 70% equity. R. Runner believes that Dynamite will generate a return of 10% over the next year. Since Y. Lee is new to the job, he decides to do a little research on his own. He finds a company, Explosions Unlimited, that has very similar business as Dynamite. Explosions has an equity beta of 1.05 and is composed of 40% debt and 60% equity. Should Peter the Anteater buy the stock? The expected return on the market is 12% and the expected risk-free rate is 5%.
Let us suppose, a company has 1 million outstanding shares of stock, each valued at 25$. Let us also suppose that the replacement cost of its physical capital stock is 18 million $. a. Should this firm invest in more physical capital?b. Would your answer in part (a) change, if the replacement cost of its physical capital stock changes to 28 million $?
Use the following questions to answer Q5 to 07. Hamstrung Electronics Inc. (HEI) has 6 billion shares outstanding and a share price of $15. HEI is considering developing a new product in house at a cost of $500 million. Alternatively, HEI can acquire a firm that already has the technology for $450 million worth (at the current price) of HEI's stock. Suppose that absent the expense of the new technology, HEI will have EPS of 5 0.78. 5. Suppose HEI develops the product in house. What impact would the development cost have on HEI's EPS? Assume all costs are incurred this year and are treated as an R&D expense, HEI's tax rate is 25% and the number of shares outstanding is unchanged. A. EPS will increase by $0.06. B EPS will decrease by $0.06. C. EPS will increase by $0.16. D. EPS will decrease by $0.16. 6. Suppose HEI does not develop the product in house but instead acquires the technology. What effect would the acquisition have on HET's EPS this year? (Note that acquisition expenses…
Kevin Chang’s restaurant chain has a net income of $1 million, a dividend payout ratio of 50%, and assets of $8 million. If Kevin wishes his restaurant chain to grow at 10% next year, and his assets must grow with sales and net income, what is his external financing needed? You may calculate the pro-formas assuming the only liabilities that Kevin has are long term debt and retained earnings (equity). **Please explain each step Answer= Needs to fund $800,000 increase in assets. New ΔRE = ($1.1 million *1/2) = $550,000. So the EFN = 800,000-550,000 = $250,000.
7. Your company is currently contemplating whether to buy Hot House, a national chain of computer systems consultants based in California. Your job is to estimate the market value of the equity in Hot House. To accomplish this task, you have gathered the following information. The estimated FCFF generated by Hot House for each of the next five years are as follows. CFF 1 $2,400 2 3 4 5 $2,910 $3,452 $4,452 $5,352 Subsequent to year 5, you estimate that the cash flows will grow at 6% indefinitely. Currently, the company has $5 million of debt outstanding, but that debt balance is expected to increase by 5% at the end of each year. Thus, the current debt balance of $5 million will increase to $5.25 million at the end of year 1, $5.5125 million at the end of year 2, etc. Fortunately, the before-tax cost of debt is expected to remain stable at 12%. Finally, you estimate that the required return on the unlevered equity is 16%. If the company has 1 million shares outstanding, what is the…
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) 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…
You have started a company and are in luck—a venture capitalist has offered to invest. You own 100% of the company with 4.56 million shares. The VC offers $1.03 million for 820,000 new shares. b. What is the post-money valuation? c. What fraction of the firm will you own after the investment?
Help Save & Ex Chee Ethelbert.com is a young software company owned by two entrepreneurs. It currently needs to raise $918,400 to support its expansion plans. A venture capitalist is prepared to provide the cash in return for a 40% holding in the company. Under the plans for the investment, the VC will hold 16,400 shares in the company and the two entrepreneurs will have combined holdings of 24,600 shares. a. What is the total after-the-money valuation of the firm? (Enter your answer in dollars not millions.) Valuation of the firm b. What value is the venture capitalist placing on each share? Value of each share < Prev 2 of 8 Next m arch hp 寻
A1. Payout policy (Answer all parts of this question.) (a) , What is the main theorem of Modigliani and Miller regarding the payout policy of firms? Explain. 1 (b) List four assumptions that must hold for the Modigliani-Miller theorem to be valid. (c) Consider a company that has 100 million shares outstanding. The market value of the company is currently at GBP 5 billion. Last year, the company paid out an annual dividend of GBP 2 per share. This year, the company intends to double the dividend to shareholders, but since the company has not enough cash, the company intends to raise the additional money required to pay the dividend in rights issue. i. ( If the price of a new share offered is GBP 25, what is the fair value of a right to buy a new share? Hint: The company first pays the dividends, and then raises the capital. ii. ( ) Contrary to theory, however, as soon as the company announces the rights issue, the share price drops. Why? Think of a reason why this transaction, i.e.,…
If you own 14,000 shares of stock of Nike and it pays a dividend of $0.26 per share, then what is the total dividend you will receive? The total dividend that you will receive is $ (Round to the nearest dollar.)
Hargrave Kitchen & Bath has 6 million shares outstanding at a price of $33.25 per share. The company has decided to raise capital through a rights issue. All shareholders will be issued one right per share. For every five rights held by the stockholder, they can buy one share at a price of $33.25. How much money will this raise, if all shareholders exercise their rights? Round to one decimal place. A. $30.0 million B. $33.3 million C. $39.9 million D. $234.4 million E. $199.5 million

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