Advanced Corporate Finance Essay examples

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Advanced Corporate Finance I SS 2012

Problem Set 1 Valuing Cash Flows

Problem Set 1
Valuing Cash Flows
Exercise 1 (Ex. 11.2 - 11.6 GT): Assume that Marriott’s restaurant division has the following joint distribution with the market return: Market Scenario Bad Good Great .25 .50 .25 Probability Market Return (%) -15 5 25 YR 1. Cash Flow Forecast $40 million $50 million $60 million

Assume also that the CAPM holds. 11.2 Compute the expected year 1 restaurant cash flow for Marriott. 11.3 Find the covariance of the cash flow with the market return and its cash flow beta. 11.4 Assuming that historical data suggests that the market risk premium is 8.4 percent per year and the market standard deviation is 40 percent per year, find the
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Hint: Use equation (13.7) to obtain βU A from βE . 13.2 Compute βU A , the beta of the unlevered assets of the Hughes acquisition, by taking the average of the betas of the unlevered assets of Lockheed and Northrop. 13.3 Compute the βE for the Hughes acquisition at the target debt level. 13.4 Compute the WACC for the Hughes acquisition. 13.5 Compute the value of Hughes with the WACC from exercise 13.4. 13.6 Compute the value of Hughes if the WACC of GM at its existing leverage ratio is used instead of the WACC computed from the comparison firms (see Ex. 13.4).

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Advanced Corporate Finance I SS 2012

Problem Set 1 Valuing Cash Flows

Exercise 3 (Ex. 13.14 GT): SL, Inc., is currently an all equity-firm with a beta of equity of 1. The risk-free rate is 5 percent and the market risk premium is 8 percent. Assume the CAPM is true and that there are no taxes. 1. What is the company’s weighted average cost of capital? 2. If management levers the company at a debt to equity ratio of 5 to 1, using perpetual riskless debt, what will the WACC become? 3. How would your WACC answer change if the government raises the tax rate from zero to 30 percent?

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Advanced Corporate Finance I SS 2012

Problem Set 1 Valuing Cash

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