Corporate Finance Problem Set Solution;solutions To Capital Structure Problem - Masters Programs - Solutions To Capital Structure Problems

1496 words - 6 pages

1)a) Assuming perfect capital markets: This follows MM1 , and there are no taxes.
Beta of equity is determined by multiplying the beta of unlevered firm with one plus debt equity.
After repurchase the amount of equity will be reduced by 40%,and thus equity will be 60%.40% repurchase is using debt, thus debt is 40%
· βL = Levered or Equity Beta
· D/E = Market value Debt to equity ratio
· βu = Unlevered or Asset Beta
Details about Yerba industries:
Stock beta=1.2
Expected return in the unlevered firm(=12.5%
New risk-free debt (=5%
Repurchase=40% of stock
On Substituting the variables in the above equation,
= 2
Therefore, beta of the stock after this transaction is 2
b) In perfect capital markets, the second proposition of Modigliani and Miller holds.
Cost of equity ( is increasing in the percentage of debt in the capital structure.
c)Expected earning per share in the coming year=$1.50
Forward P/E ratio=14
Market price per share=P/E ratio* expected earning per share
=14*$1.50 =$21
Amount of borrowing required per share=Market price per share *Percentage repurchased
So 40% of $21 or $8.1 is borrowed
And interest is 5% of 8.4 which is $0.42
Earning per share after interest = Current earnings per share-interest per share
Earnings per share after transaction=(Earnings per share after interest/Percentage of equity after repurchase)
There is no benefit in this, the stock price does not change, but the risk involved in the transaction is high for shareholders. This is because of interest payments to debtholders.
d)P/E ratio = (Market price per share/Earnings per share after this transaction)
The P/E ratio has fallen from level of 14 to 11.67.This has happened because of the increase in the risk of the transaction. This increase in risk reduced the expectation of the investors.
3) a. False. There may be required capital expenditures or working capital needs that drain firm’s cash flows.
b. False. Depreciation may also be large and this can offset the capital expenditure.
c. False. This can be true sometimes. Commitment to pay interest expenses is more than commitment to pay dividends.
d. False. When managers are not owners , they may need debt to be disciplined.
e. False. This is not always the case. Firms which are mature and run well can have high free cash flows.
4) a. Cost of Equity = Re = Rf + βe*ERP (1)
Rf =6.50%
βe =1.47%
Plugging these values in (1) we get,
Cost of equity = 6.50% + 1.47 (5.5%) = 14.59%
Cost of Capital = E/(E + D)*Cost of Equity+ D/(E + D)*After tax cost of debt (2)
=14.59% (24.27/(24.27+ 2.8)) + 6.8% (1-0.4) (2.8/(24.27+2.8)) =13.50%
b. If Pfizer moves to a 30% debt ratio,
New debt/equity ratio = 30/70 = 42.86%
Unlevered Beta =
=1.47/(1+0.6*(2.8/24.27)) = 1.37
New Beta =
=1.37 (1+0.6*0.4286) = 1.72
New Cost of Equity using (1) = 6.5% + 1.72 (5.5%) = 15.96%
New Cost of Capital using (2)= 15.96% (0.7) + 8.5% (1-.4) (0.3) = 12.70%
c. If ...

More like Corporate Finance Problem Set Solution;solutions To Capital Structure Problem - Masters Programs - Solutions To Capital Structure Problems

Some Solutions To Problems With Water Ethics - English 101 - Essay

1138 words - 5 pages ... populations. Contrarily, it is a scarce resource in most of the developing countries. Worldwide more than 1 billion people still do not have access to safe drinking water. This imbalance has posed for an objective to create a solution where resources are equitably shared. Water ethics is the concern about access to purified water and sanitation. There have been multiple solutions brought up by the people in water resource management on what we ...

The Problem And Answers To An AI Course About The Problem Set One - Bishop Oconnell - Problem Set AI

754 words - 4 pages ... Bradford Brown SCI 1000C Problem Set 1 1. Artificial Intelligence includes both science and engineering to mimic the human brain and understand how to reason like it. AI combines the science of how the human brain functions and the engineering behind the machines used to compute AI. 2. a. Reflex actions are rational and necessary to minimize pain or avoid danger. These action are not a form of intelligence because it is apart of a natural ...

UCSD Finance Mgmt- Chapter Solutions - UCSD -finance Management - Homework Solutions

1108 words - 5 pages ... %. d. Some investors need cash dividends (retired people), while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized. Currently (2011), dividends to individuals are now taxed at the lower capital gains rate of 15%; however, as we work on these solutions, this is set to expire at the end of 2012 and taxation of dividends is set to increase to pre-2003 levels. ...

Time Value Problem Set And Answers - Umsl/finance 6500 - Assignment

828 words - 4 pages ... 1 Rev: SP2019 FINANCE 6500 TIME VALUE PROBLEM SET Please use your calculator to answer the following questions. Write your answer below each question, including the calculator keystrokes. The Open Market Committee of the US Federal Reserve System targets inflation as a means of controlling the economy. They have repeatedly stated their desire to have an annual inflation rate of 2%. Suppose they are able to achieve this year-in and year out ...

Problem Solution: Gene One Corporation

5259 words - 22 pages ... Problem Solution PAGE \* MERGEFORMAT 1 Problem Solution: Gene One CorporationToshira D. McCoyUniversity of PhoenixProblem Solution: Gene One CorporationBiotechnology refers to "techniques that use organisms or their cellular, subcellular, or molecular components to make products or modify plants, animals, and micro-organisms to carry desired traits" (Paugh et al, 1997, page 9). The biotechnology industry has developed dramatically throughout ...

Accounting 3&4 Chapter 10 Exercise Solutions - WLC - Solution

3490 words - 14 pages ... Chapter 10 Balance Day Adjustments: Expenses – Solutions to exercises Exercise 10.1 Prepaid expense a Cash Payments Journal Date Details Ch. No. Bank Disc Rev. Creditors Control Stock Control Wages Sundries GST Mar. 1 Prepaid Rent Expense 34 6 600 6 000 600 b Accounting principle Reporting Period Explanation The business will have the use of the premises for March–June 2015, and will therefore consume some of the rent in the Reporting Period ...

Capital Budgeting Accounting And Finance - Berkeley - Paper

2820 words - 12 pages ... the consultant $10,000 for his work. UPC faces a corporate tax rate of 35%. UPC is an equity financed firm. The cost of equity capital is 10%. Cash flows are end of year unless noted. Question: Should UPC buy the new machine? Conceptually, we already know how to do this: I Calculate the NPV of the cash flows associated with the project. But, getting to the cash flows will require some work. Donatella Taurasi (Fung Institute) Accounting and Finance ...

Macroeconomics Country Analysis - RMIT - Problem Set

615 words - 3 pages ... Macroeconomics ECON 1192 - Individual Problem Set 1 Question 1 i. Turkeys GNI per capita ranked at 50th and HDI ranked at 76th out of 198 countries in 2017 (UNDP 2018a). ii. There is a large difference between GNI per capita ranking and the HDI ranking of Turkey. HDI is a composite of three indicators which are GNI per capita to evaluate the economic performance, life expectancy at birth to measure the health and expected years and means ...

Unit 4 Problem Set For AP Macroeconomics - AP Macroeconomics - Problem Set

852 words - 4 pages ... Zhu 2 Kevin Zhu F Block Mr. Carmer 27 February 2019 Macro Unit 4 Problem Set 1. Define and give specific examples of transaction demand for money and asset demand for money a. Transaction demand for money is people hold money for everyday transactions. For example, lunch money and bus fee would be a transaction demand. Asset Demand for Money is people hold money since it is less risky than other assets. For example, there is a recession ...

MBA 510 Individual – Problem Set II

950 words - 4 pages ... Chapter 9 Exercise 1212. The American Sugar Producers Association wants to estimate the mean yearly sugar consumption. A sample of 16 people reveals the mean yearly consumption to be 60 pounds with a standard deviation of 20 pounds.A. What is the value of the population mean? What is the best estimate of this value?Answer: The population mean is unknown because the sum of the values is not known. The best estimate is 60 pounds, which is also the ...

Problem Set 7 For Macroeconomics. Government Savings, IS-FE-AM Graph - Columbia Sipa ECON - Assignment

1183 words - 5 pages Free ... Macroeconomic Analysis for International and Public Affairs U6401 Problem Set 7 Due on April 2 at 6:00pm 1. Please drop your homework in mailboxes 7 or 10 in the 6th-floor mail room, close to the Office of Student Affairs. 2. You only have to submit ONE homework paper per group. 3. Please make sure you write both first and last names of each group member on the first page of the homework paper. 4. While your answers should be typed, you do not ...

Describes In Simple Terms The Problems Facing The Ozone Layer, Including The Problem Of Cpc's And The Emergence Of A "hole"---includes Bibliography

2318 words - 10 pages Free ... Ozone, a gas very similar to oxygen, can both help and harm humans, yet a problem has recently risen as levels of "good" ozone is being depleted. However, the source of this depletion created a big controversy when it was discovered, and, although it is now rarely mentioned, a dispute still exists. The problem arises that not all scientists, and other people for that matter, believe that chlorofluorocarbons (CFC's) are enhancing the problem ...

Causes-effects-and Solutions To Deforestation - SPC - 5 Minute Speech

469 words - 2 pages Free ... Ignacio Agramonte | 2 According to United Nations Food and Agricultural Organization; an estimated 18 million acres of forest are lost each year worldwide. (The size of the country of Panama!) Deforestation is the permanent removal of forests to make land available. Deforestation is a concerning worldwide problem; that is why its causes, effects and solutions will be revealed. · Deforestation is caused by an extensive list of elements The ...

Reviewing The Research Structure - GNED221 - Introduction To Research Design - Assignment

1598 words - 7 pages ... GNED 221 – Introduction to Research Design Assignment 3: Reviewing the Research Structure of an academic, peer-reviewed[footnoteRef:1] article in The Canadian Geographer [1: ] Full Citation of the chosen article: Northcott, H. C., & Petruik, C. R. (2013). Trends in the residential mobility of seniors in Canada, 1961-2006. Canadian Geographer, 57(1), 43-55. doi:10.1111/j.1541-0064.2012.00449.x Questions (5 pts. each) Answers (in your own words ...

Should Vandals Be Subjected To Capital Punishment - Nan Hua High - Essay

889 words - 4 pages ... Should vandals be subjected to capital punishment? What is vandalism? Vandalism is an intentional act that defaces, destroys, or otherwise damages another’s property without permission. Generally, vandalism is defined as an intentional act that defaces, mars, destroys, alters, or otherwise damages another’s property without that person’s permission. Some famous example of vandalism in Singapore includes a famous duo named the “McKoy Banos” they ...