EBK FINANCIAL MANAGEMENT: THEORY & PRAC
15th Edition
ISBN: 9781305886902
Author: EHRHARDT
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 15, Problem 10MC
Summary Introduction
Case summary:
Company P is a regional pizza restaurant chain. The given details are as follows,
EBIT is $50 million,
Tax rate is 40%,
Risk-free
Market risk premium is 6%,
Outstanding shares 10 million.
As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.
To determine: Values of Company L’s stock and debt and yield on debt.
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You are given the following data: • k* = real risk-free rate = 4%. • Constant inflation premium = 7%. • Maturity risk premium = 1%. • Default risk premium for AAA bonds = 3%. • Liquidity premium for long-term T-bonds = 2%. Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the nominal risk-free rate for T-bills is , and the rate on long-term Treasury bonds is
4%; 14%
4%; 15%
11%; 14%
11%; 15%
The risk-free rate on long-term Treasury bonds is 6.04%. Assume thatthe market risk premium is 5%. What is the required return on the market? Now use the SML equation to calculate the two companies’ requiredreturns.
Suppose the CAPM is true. Consider two
assets, X and Y, and the market M. Suppose
cov(X,M) = .3, cov(Y,M) = .5.
%3D
(a) Is the expected return higher on X or Y?
(b) Suppose var(M) = 1.5, what are the betas
of X and Y?
(c) Suppose the expected market return is
20% and the risk free rate is 5%, what is the
expected returns of X and Y?.
(d) Given your analysis in (a)-(c), what type
of investor would prefer asset X to asset Y?
Chapter 15 Solutions
EBK FINANCIAL MANAGEMENT: THEORY & PRAC
Ch. 15 - Prob. 1QCh. 15 - What term refers to the uncertainty inherent in...Ch. 15 - Firms with relatively high nonfinancial fixed...Ch. 15 - “One type of leverage affects both EBIT and EPS....Ch. 15 - Why is the following statement true? Other things...Ch. 15 - Why do public utility companies usually have...Ch. 15 - Why is EBIT generally considered to be independent...Ch. 15 - If a firm went from zero debt to successively...Ch. 15 - Prob. 9QCh. 15 - Prob. 1P
Ch. 15 - Prob. 2PCh. 15 - Ethier Enterprise has an unlevered beta of 1.0....Ch. 15 - Nichols Corporations value of operations is equal...Ch. 15 - Lee Manufacturings value of operations is equal to...Ch. 15 - Dye Trucking raised $150 million in new debt and...Ch. 15 - Schweser Satellites Inc. produces satellite earth...Ch. 15 - Prob. 8PCh. 15 - Prob. 9PCh. 15 - Beckman Engineering and Associates (BEA) is...Ch. 15 - Prob. 11PCh. 15 - A. Fethe Inc. is a custom manufacturer of guitars,...Ch. 15 - Prob. 13SPCh. 15 - Prob. 1MCCh. 15 - Prob. 2MCCh. 15 - Prob. 4MCCh. 15 - Prob. 5MCCh. 15 - Prob. 6MCCh. 15 - Prob. 7MCCh. 15 - Prob. 10MCCh. 15 - Prob. 11MCCh. 15 - Prob. 12MC
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