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##### Finance Eight Problems

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Question;1. [20];Here are returns;Stock-A Market;Yr-1 14% 12%;Yr-2 19 10;Yr-3 -16 -12;Yr-4 3 1;Yr-5 20 15;a. 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 million;Common Equity \$ 100 million;You 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 million;Face value of pure discount bond \$ 4 million;Debt Maturity 3 years;Asset return? 60%;Rf5%;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?

Paper#50212 | Written in 18-Jul-2015

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