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Week 9 assignment

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Question;1);In a world with;no frictions (taxes, etc.), valueis created by how you finance a;2);The return on;equity is equal to the return on assetsof a project/firm.;3);Suppose the;expected returns on equity of two firms, Macrosoft and Microsoft, that operate;in the same industry are 10.50% and 12.60%, respectively. What is the return on;assets in this business if Macrosoft has no debt? (Enter the answer with no;more nor less than two decimal places, and leave off the % sign. For example;if your answer is 13.97% you should enter it as 13.97 NOT 0.14 nor 14).;4);Suppose CAPM;holds, and the beta of the equity of your company is 2.00. The expected market;risk premium (the difference between the expected market return and the;risk-free rate) is 4.5% and the risk-free rate is 3.00%. Suppose the;debt-to-equity ratio of your company is 20% and the market believes that the;beta of your debt is 0.20. What is return on assets of your business? (Enter;the answer with no more nor less than two decimal places, and leave off the %;sign. For example, if your answer is 13.97% you should enter it as 13.97 NOT;0.14 nor 14).;5);You;are planning on opening a consulting firm. You have projected yearly cash flows;of $2 million starting next year (t = 1) with a growth rate of 3% over the;foreseeable future thereafter. This endeavor will require a substantial;investment and you will have to convince investors to provide you the capital;to do so. You will invest some of your own money, convincing other investors;will of course be useful for your valuing your own investment decision. A;critical piece of your analysis is figuring out the present value of the cash;flows of the business. Your research has revealed the following information;similar consulting businesses equity has an average beta of 2.40 and the;average debt-to-equity ratio in this industry is 10%. The risk-free rate is;3.25% and the expected market risk premium (the average difference between the;market return and the risk-free rate) is 4.50%. What is the value of the cash;flows of your business?;18099548.;20060181.;6);Your firm has;been plodding along without much attention from the stock market, both analysts;and investors are not showing much interest in your company. Your boss insists;that (a) he can increase the return on equity of the company by simply taking;on more debt and (b) that will attract new investors to the firm because of the;higher returns.;7);Two firms, ABC;Inc., and XYZ, Inc., are in the same business. XYZ, Inc., has debt that is;viewed by the market as risk-less with a market value of $250 million. ABC;Inc., has no debt. Both firms are expected to generate cash flows of $50;million per year for the foreseeable future and the market value of the equity;of ABC, Inc is $500 million. Estimate the return on equity of XYZ, Inc. Assume;there are no taxes, and the risk-free rate is 4%. (Enter the answer with no;more nor less than two decimal places, and leave off the % sign. For example;if your answer is 13.97% you should enter it as 13.97 NOT 0.14 nor 14);8);Banana, Inc. has;had debt with market value of $0.5 million that has paid a 5% coupon and has;had an expiration date that is far, far away. The expected annual earnings;before interest and taxes for the firm are $1 million and the firm has not;grown, nor does it have plans for any growth. The firm however has just raised;more equity to retire all its debt. If the required rate of return to;equity-holders (after the capital structure change) is now 10%, what is the;market value of the firm? Assume there are no taxes. (Enter just the number;without the $ sign or a comma, round to the nearest whole dollar.);9);Suppose;all investors are risk-averse and hold diversified portfolios. You are;evaluating a new drug company that is going to have two divisions: an R&D;unit and a Sales unit. Your CEO and you are arguing about whether the two units;should have the same cost of capital (WACC), or whether the discount rates;should be different. If different, what should be the relative magnitudes of;the discount rates, that is, which unit R&D or Sales should have the higher;discount rate. Assume the discount rates of the two units are labeled as R (for;R&D) and S (for Sales), respectively. What do you think?;S>R.;The same discount rates for;both divisions/units (R=S).;R>S.;10);AmRail has been;granted permission to transport passengers between major U.S. cities. The new;company faces competition from regional railway companies that operate between;major cities in their regions. The betas of the equity of the four major;competitors (A, B, C, D) are 1.10, 1.20, 1.30, and 1.40, and the debt-to-equity;ratios of these four companies (in the same order: A, B, C, D) are 0.10, 0.20;0.30, 0.40. Although these D/E ratios vary, all debt is considered risk-free in;the market place because railways are expected to dominate all long-distance;public transportation. Suppose the expected market risk premium (the average;difference between the market return and the risk-free rate) is 5% and the risk;free rate is 4%. What is the cost of capital (or discount rate) that you should;use in valuing AmRail? Assume there are no taxes. (Enter the answer with no;more nor less than two decimal places, and leave off the % sign. For example;if your answer is 13.97% you should enter it as 13.97 NOT 0.14 nor 14)

 

Paper#48674 | Written in 18-Jul-2015

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