Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 12, Problem 20P
Summary Introduction
To determine: The beta of the project.
Introduction:
Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market.
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Q2. Suppose you are the chief financial officer of Toktik Co. and you are trying to
determine the optimal capital structure for the company using the cost of capital
approach. On the day of this exam, you have collected the following company and
market data:
The beta of the company is 2.6;
• 10-year Treasury bond rate is 1.6% and the current market equity risk premium is
6.9%;
• The company's current bond rating is BB by Standard & Poor's;
• The firm currently has 5.2 billion shares outstanding with share price at $120 and
the firm's market value of debt is $264 billion
• The company's marginal tax rate is 35%.
Also you are given the following table concerning the latest information on bond
rating and the corresponding default spread:
Default spread
Rating
AAA
0.69%
AA
0.85%
A+
1.07%
A
1.18%
А-
1.33%
BBB
1.71%
BB+
2.31%
BB
2.77%
B+
4.05%
4.86%
В-
5.94%
ССС
9.46%
CC
9.97%
13.09%
D
17.44%
Required:
a) Briefly explain, by referencing relevant capital structure theories, the mechanisms…
(CHAPTER 14) You researched Turnkey Investment's financial data and gathered the following information: Current price per share of stock = $105 Expected market portfolio return = 10.1% financial reports on the screen Dividend per share paid just recently = $4.69 Risk-free interest rate = 3.7% Expected annual growth of dividend per share = 5% Stock Beta = 1.37 Calculate the company's cost of equity using the Capital Asset Pricing Model approach. Your answer should be in percent, not in decimals: e.g., 10.23 rather than 0.1023. Do NOT use "%" in your answer. Increase decimal places for any intermediate calculations, from the default 2 to 6 or higher, and only round your final answer to TWO decimal places: for
Your PE firm is considering acquiring a publicly traded digital advertising company, Star Dust Enterprises
(SDE). The following are some key statistics of the stock of SDE today (t = 0). SDE is 100% equity financed. Its
cost of capital (apply this to all cash flows) is 11.2% and the payout ratio is 79%. Expected earnings per share
of SDE at next year (t = 1) are $6.6. Assume that without new investments, expected earnings of SDE would
remain at their time-1 level in perpetuity. All future investments are expected to generate $0.2 in incremental
earnings for each $1 of investment. For an investment made at time t, incremental cash flows are generated
starting in year t + 1.
(a) Compute expected dividend per share of SDE next year (t = 1):
$
(b) Compute expected dividend per share of SDE two years from now (t = 2):
$
(c) What is the present value of growth opportunities (PVGO) of SDE today?
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Chapter 12 Solutions
Corporate Finance
Ch. 12.1 - According to the CAPM, we can determine the cost...Ch. 12.1 - What inputs do we need to estimate a firms equity...Ch. 12.2 - How do you determine the weight of a stock in the...Ch. 12.2 - Prob. 2CCCh. 12.2 - Prob. 3CCCh. 12.3 - How can you estimate a stocks beta from historical...Ch. 12.3 - How do we define a stocks alpha, and what is its...Ch. 12.4 - Why does the yield to maturity of a firms debt...Ch. 12.4 - Prob. 2CCCh. 12.5 - Prob. 1CC
Ch. 12.5 - Prob. 2CCCh. 12.6 - Why might projects within the same firm have...Ch. 12.6 - Under what conditions can we evaluate a project...Ch. 12.7 - Prob. 1CCCh. 12.7 - Prob. 2CCCh. 12 - Prob. 1PCh. 12 - Suppose the market portfolio has an expected...Ch. 12 - Prob. 3PCh. 12 - Suppose all possible investment opportunities in...Ch. 12 - Using the data in Problem 4, suppose you are...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Suppose that in place of the SP 500, you wanted to...Ch. 12 - Prob. 9PCh. 12 - You need to estimate the equity cost or capital...Ch. 12 - In mid-2012, Ralston Purina had AA-rated, 10-year...Ch. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Your firm is planning to invest in an automated...Ch. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Weston Enterprises is an all-equity firm with two...Ch. 12 - Prob. 24PCh. 12 - Your company operates a steel plant. On average,...Ch. 12 - Prob. 26PCh. 12 - You would like to estimate the weighted average...Ch. 12 - Prob. 22P
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