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Finance Eight Problems Assignment Solution

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Question;1. [20]Here are returns:Stock-A MarketYr-1 14% 12%Yr-2 19 10Yr-3 -16 -12Yr-4 3 1Yr-5 20 15a. Compute the beta for A.b. Compute the required rate of return for A.c. Suppose stock A?s return is 23%, is the stock fairly valued?2. [14]Six-Sixty-One Inc. has an optimal capital structure as follows:Debt $ 45 millionCommon Equity $ 100 millionYou can sell 30 year, $ 1000 face value, 6% coupon bonds at 90% of par value.The next dividend will be $ 1.50, and shares trade at $ 50. The firm?s growth rate is 10%. The tax rate is 30%.a. Compute the WACC.b. Compute the WACC if you think a capital structure of 40% debt and the rest equity is more optimal.c. In 140 characters or less [TYPED]: why do you compute the cost of capital?3. [18]Firms A {unlevered} & B sell Hot Dogs made from rattlesnake. Firm B?s capital structure is different ? it has $ 10 million, 5% coupon bonds.EBIT for the firms is $ 2 million. Cost of equity for A is 10%.a. In a M&M world ? estimate the value for A & B.b. Compute what the shareholders require as a return for A & B.4. [8]Use numbers and show me how a stock split affects the balance sheet of a firm.5. [10]Your firm has 25 million shares outstanding and they trade at $ 30. Net Income this year will be $ 3 million. You have $ 15 million to use and you plan to buy-back shares.a. What is the EPS before and after the repurchase?b. How many shares trade in the market after the buy back?6. [18]MBA Inc.Market Value of Assets $ 10 millionFace value of pure discount bond $ 4 millionDebt Maturity 3 yearsAsset return? 60%Rf 5%Compute market value of debt and equity. Use Table 17.3. DO NOT INTERPOLATE!!!Show ALL work.7. [10]DRAW a payoff diagram: You are an executive and the Board allots you an option to buy 1000 shares at $ 15. Shares trade at $ 10 now.8. [8]How does a Dutch auction work? Not more than 4 short sentences.Why does Underpricing exist?

 

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