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##### MBA570_Homework_8

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Question;Instructions: Either type or;write your answers directly on this document and submit the completed;assignment to your ESO. Show your work;for the calculations. If you use additional documents for the calculations;label them with your name and course number (MBA 570) and submit them as well.;Each question is worth 10 points.;1.;Gladstone Corporation is about to;launch a new product. Depending on the success of the new product, Gladstone;may have one of four values next year: $155 million, $130 million, $97 million;or $82 million. These outcomes are equally likely and the risk is;diversifiable. Gladstone will not make any payouts to investors during the;year. Suppose the risk-free interest rate is 5.2% and assume perfect capital;markets.;a.;The;initial value of Gladstone?s equity without leverage is $__________ million. (Round to two decimal places.);b.;Now;suppose Gladstone has zero-coupon debt with a $100 million face value due next;year. The initial value of Gladstone?s debt is __________%. (Round to two decimal places.);c.;The;yield-to-maturity of Gladstone?s debt is $__________ million. (Round to the nearest integer.);d.;The;initial value of Gladstone?s equity is $__________ million. (Round to two decimal places.);e.;Gladstone?s;total value with leverage is $__________ million. (Round to two decimal places.);2.;Suppose;Tefco Corp. has a value of $155 million if it continues to operate, but has;outstanding debt of $187 million that is now due. If the firm declares;bankruptcy, bankruptcy costs will equal $19 million, and the remaining $136;million will go to creditors. Instead of declaring bankruptcy, management;proposes to exchange the firm?s debt for a fraction of its equity in a workout.;The minimum fraction of the firm?s equity that management would need to offer;to creditors for the workout to be successful is __________% of the firm. (Round to one decimal place.);3.;Kohwe;Corp. plans to issue equity to raise $60 million to finance a new investment.;After making the investment, Kohwe expects to earn free cash flows of $9;million each year. Kohwe currently has 5 million shares outstanding and has no;other assets or opportunities. Suppose the appropriate discount rate for;Kohwe?s future free cash flows is 9%, and the only capital market imperfections;are corporate taxes and financial distress costs.;a.;The;NPV of Kohwe?s investment is $__________ million. (Round to one decimal place.);b.;Kohwe?s;price per share today is $__________. (Round;to nearest cent.);c.;Suppose;Kohwe borrows the $60 million instead. It will pay interest only on this loan;each year, and maintain an outstanding balance of $60 million on the loan.;Suppose that Kohwe?s corporate tax rate is 40%, and expected free cash flows;are still $9 million each year. Kohwe?s price per share today if the investment;is financed with debt is $__________. (Round;to nearest cent.);d.;Now;suppose that with leverage, Kohwe?s expected free cash flows will decline to $8;million per year due to reduced sales and other financial distress costs.;Assume that the appropriate discount rate for Kohwe?s future free cash flows is;still 9%. Kohwe?s price per share today given the financial distress costs of;leverage is $__________. (Round to nearest;cent.);4.;Marpor;Industries has no debt and expects to generate free cash flows of $16 million;each year. Marpor believes that if it permanently increases its level of debt;to $35 million, the risk of financial distress may cause it to lose some;customers and receive less favorable terms from its suppliers. As a result;Marpor?s expected free cash flows with debt will be only $15 million per year.;Suppose Marpor?s tax rate is 35%, the risk-free rate is 6%, the expected return;of the market is 13%, and the beta of Marpor?s free cash flows is 1.1 (with or;without leverage).;a.;Marpor?s;value without leverage is $__________ million. (Round to the nearest integer.);b.;Marpor?s;value with the new leverage is $__________ million. (Round to two decimal places.);5.;Zymase;is a biotechnology startup. Researchers at Zymase must choose one of three;different research strategies. The payoffs (after-tax) and their likelihood for;each strategy are shown in the table below. The risk of each project is;diversifiable.;Strategy;Probability;Payoff ($;million);A;100%;80;B;50%;140;50%;0;C;10%;330;90%;20;a.;Which;project has the highest expected payoff?;A. Project A;B.;Project B;C. Project C;b.;Suppose;Zymase has debt of $40 million due at the time of the project?s payoff. Which;project has the highest expected payoff for equity holders?;A. Project A;B.;Project B;C. Project C;c.;Suppose;Zymase has debt of $110 million due at the time of the project?s payoff. Which;project has the highest expected payoff for equity holders?;A. Project A;B.;Project B;C. Project C;d.;If;management chooses the strategy that maximizes the payoff to equity holders;the expected agency cost to the firm from having $40 million in debt due is;$__________ million. (Round to the;nearest million.);e.;If;management chooses the strategy that maximizes the payoff to equity holders;the expected agency cost to the firm from having $110 million in debt due is;$__________ million. (Round to the;nearest million.);6.;RFC;Corp. has announced a $1.90 dividend. If RFC?s price last price cum-dividend is;$21, assuming perfect capital markets, RFC?s first ex-dividend price should be;$__________. (Round to two decimal;places.);7.;EJH;Company has a market capitalization of $2.1 billion and 35 million shares outstanding.;It plans to distribute $95 million through an open market repurchase. Assuming;perfect capital markets;a.;The;price per share of EJH right before the repurchase is $__________. (Round to two decimal places.);b.;The;number of shares to be repurchased is __________ million. (Round to two decimal places.);c.;The;price per share of EJH right after the repurchase will be $__________. (Round to two decimal places.);8.;The;HNH Corporation will pay a constant dividend of $4 per share, per year, in;perpetuity. Assume all investors pay a 15% tax on dividends and that there is;no capital gains tax. The cost of capital for investing in HNH stock is 13%.;a.;The;price per share of HNH stock is $__________. (Round to two the nearest cent.);b.;Assume;that management makes a surprise announcement that HNH will no longer pay;dividends but will use the cash to repurchase stock instead. The price per;share of HNH stock is now $__________. (Round;to two the nearest cent.);9.;Assume;capital markets are perfect. Kay Industries has $125 million invested in;short-term Treasury securities paying 7%, and it pays out the interest payments;on these securities each year as a dividend. The board is considering selling;the Treasury securities and paying out the proceeds as a one-time dividend;payment. Assume that Kay must pay a corporate tax rate of 40%, and investors;pay no taxes.;a.;If;the board went ahead with this plan, what would happen to the value of Kay;stock upon the announcement of a change in policy?;A. The value of Kay would fall by $125;million.;B. The value of Kay would rise by $125 million.;C. The value of Kay would rise by $125 x;40% = $50 million.;D. The value of Kay would remain the same.;b.;What;would happen to the value of Kay stock on the ex-dividend date of the one-time;dividend?;A. The value of Kay would rise by $125;million.;B. The value of Kay would remain the same.;C. It is difficult to tell because the;price reaction depends on investor preferences.;D.;The value of Kay would fall by $125 million.;c.;Given;these price reactions, will this decision benefit investors?;A. It is difficult to tell because the;price reaction depends on investor preferences.;B. It will benefit investors.;C. It will hurt investors.;D.;It will neither benefit nor hurt investors.;10.;Suppose;the stock of Host Hotels & Resorts is currently trading for $20 per share.;a.;If;Host issues a 20% stock dividend, the new price per share will be $__________. (Round to the nearest cent.);b.;If;Host does a 3:2 stock split, the new price per share will be $__________. (Round to the nearest cent.);c.;If;Host does a 1:3 reverse split, the new price per share will be $__________. (Round to the nearest cent.)

Paper#48075 | Written in 18-Jul-2015

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