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##### FIN 620 Capital Markets, Institutions and L...

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FIN 620 Capital Markets, Institutions and Long-Term Financing Midterm Examination: Sessions 1-5 Each question is worth 10 Points. Place your final answers on the first worksheet, then show your work to each problem on a separate worksheet. 1. You have a sample of returns observations for a mutual fund. The 4 returns are 7.25%, 5.6%, 12.5%, 1.0%. What is the average return and variance of these returns? 2. A company is considering a new investment. The investment cost is expected to be \$72 million and will return \$13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. Assuming average risk, what?s the appropriate discount rate? 3. A corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. The corporation has a zero tax rate. What is the asset beta? 4. Suppose a company's common stock has a beta of 1.6. If the risk-free rate is 5% and the market risk premium is 4%, what?s the expected return on the company?s common stock? For Questions 5 and 6 below: Information on shareholder's equity as currently shown on the books of a corporation is given as: Common shares (\$2.00 par value) \$350,000 Capital in Excess of Par 0 Retained Earnings 7,800,000 5. From this information, calculate the corporation's book value per share. 6. Rework the shareholder's equity as it appears on the books if the corporation issues 40,000 new shares of common at \$70 per share. 7. A corporation is unlevered and is valued at \$640,000. The corporation is currently deciding whether including debt in its capital structure would increase its value. The current cost of equity is 12%. Under consideration is issuing \$300,000 in new debt with an 8% interest rate. The corporation would repurchase \$300,000 of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding and effective marginal tax bracket is zero. What will the corporation?s new WACC be? 8. A corporation is unlevered and is valued at \$640,000. The corporation is currently deciding whether including debt in its capital structure would increase its value. The current of cost of equity is 12%. Under consideration is issuing \$300,000 in new debt with an 8% interest rate. The corporation would repurchase \$300,000 of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding and its effective marginal tax bracket is 34%. What will the corporation?s new WACC be? 9. A corporation has promised payments to its bondholders that total \$100. The company believes that there is an 85% chance that the cash flow will be sufficient to meet these claims. However, there is a 15% chance that cash flows will fall short, in which case total earnings are expected to be \$65. If the bonds sell in the market for \$84, what is an estimate of the bankruptcy costs for the corporation? Assume a cost of debt of 10%. 10. A company had net income of \$200,000 for the year ending 2008. The company decided to pay out 30% of earnings per share as a dividend. The company has 50,000 shares issued and outstanding. What are the retained earnings for 2008?

Paper#5649 | Written in 18-Jul-2015

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