F has 300,000 shares outstanding with a market value of $25 each and no debt. The of F’s equity is 0.9, the risk-free rate is 4% and the expected return of the market portfolio is 9%. F considers the following alternative operation Operation : F buys an asset A worth $2,200,000 (at market value). This purchase is financed by issuing risk-free debt for the same amount. Following the operation, F ’s equity beta increases to 1. Compute the systematic risk A of the asset A bought by F.

F has 300,000 shares outstanding with a market value of $25 each and no debt. The of F’s equity is 0.9, the risk-free rate is 4% and the expected return of the market portfolio is 9%. F considers the following alternative operation Operation : F buys an asset A worth $2,200,000 (at market value). This purchase is financed by issuing risk-free debt for the same amount. Following the operation, F ’s equity beta increases to 1. Compute the systematic risk A of the asset A bought by F.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...

See similar textbooks

Similar questions

Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about $1,937.5 million; it has $387.5 million in debt and zero preferred stock. As mentioned previously, IWT has 100 million shares of stock outstanding. Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?
The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?
a) Learn and Earn Company is financed entirely by common stock that is priced to offer a 20 percent expected return. If the company repurchases 50 percent of the stock and substitutes an equal value of debt yielding 8 percent, what is the expected return on its common stock after refinancing? A.32 percent B.28 percent C.20 percent D.14 percent b) Suppose that the market price of Company A is $50 per share and that of Company B is $20. If A offers half a share of common stock for each share of B, what is the percentage increase in wealth for B's shareholders? (Assume that the offer has no effect on the value of A's shares.) A) −20 percent B) +25 percent C) −25 percent D) +20 percent
F has 300,000 shares outstanding with a market value of $25 each and no debt. The of F’s equity is 0.9, the risk-free rate is 4% and the expected return of the market portfolio is 9%. F considers the following alternative operations: Operation 1: F pays $1,000,000 in dividends to stockholders. This dividend is financed by issuing debt for the same amount. If you hold one F stock, how much value is created/destroyed for you in this operation? Operation 2: F invests $1,500,000 in a project that generates $200,000 per year after tax (perpetuity). This project has the same systematic risk as F’s existing assets. The investment cost is financed by issuing debt for the same amount ($1,500,000). If you hold one F stock, how much value is created/destroyed for you in this operation?
Hema Corp. is an all-equity firm with a current market value of $1,230 million (i.e., $1.23 billion), and will be worth $1,107 million or $1,722 million in one year. The risk-free interest rate is 5%. Suppose Hema Corp. issues zero-coupon, one-year debt with a face value of $1,292 million, and uses the proceeds to pay a special dividend to shareholders. Suppose that in the event Hema Corp. defaults, $90 million of its value will be lost to bankruptcy costs. Assume there are no other market imperfections. a. What is the present value of these bankruptcy costs, and what is their delta with respect to the firm's assets? b. In this case, what is the value and yield of Hema's debt? c. In this case, what is the value of Hema's equity before the dividend is paid? What is the value of equity just after the dividend is paid?
Becker industries is considering an all equity capital structure against one with both debt and equity. The all equity capital structure would consist of 42,000 shares of stock. The debt and equity option wuld consist of 21,000 shares of stock plus $285000 of debt with an interest rate of 8 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes
urbriggen Corporation is considering two financing alternatives. Under the first alternative, interest expense would be $280,000 and there would be 208,000 common shares outstanding. Under the second alternative, interest costs would be $200,000 and there would be 210,000 common shares outstanding. Zurbriggen has EBIT of $800,000 and pays income taxes at a 21% rate. What would Zurbriggen’s EPS be under the second financing alternative? A. $1.75. B. $2.26. C. $2.86. D. $3.81.
ou were hired as a consultant to XYZ Company, whose target capital structure is 32% debt, 11% preferred, and 57% common equity. The interest rate on new debt is 7.60%, the yield on the preferred is 4.20%, the cost of common from retained earnings is 16.15%, and the tax rate is 36.00%. The firm will not be issuing any new common stock. What is XYZ's WACC?Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. Group of answer choices 10.21% 12.68% 13.69% 11.22% 13.58%
Barry's Ltd. is all equity financed with 18,000 shares outstanding and each share sells for $22. The EBIT of the company is $50,000. The company is debating of converting into a 40% debt capital structure, with 6% interest per annum. The cost of capital is currently 10%. Ignore taxes. You are required to answer the following: (a) What is the current market value of the company? (b) What is the market value of debt in the proposed debt capital structure? (c) How many shares must be repurchased in the proposed levered company?
TT Industries is trading for $20 per share and has 25 million shares outstanding. TT Industries has a debt-equity ratio of 0.4 and its debt is zero coupon debt with a ten-year maturity and a yield to maturity of 8%. Which of the following best describes TT's debt using a put option? A) Short $200 million in risk-free debt and Long a put option on the firm's assets with a $200 strike price B) Long $200 million in risk-free debt and Short a put option on the firm's assets with a $700 strike price C) Long $200 million in risk-free debt and Short a put option on the firm's assets with a $200 strike price D) Short $200 million in risk-free debt and Long a put option on the firm's assets with a $700 strike price
The DestitutusVentis Company (DV Co) has the following items on its balance sheet (question mark means that the quantity is unknown): Type of asset/liability Market value Risk (beta) Cash holdings £20m 0 Fixed investments £180m ? Short term debt £10m 0 Long term debt £70m 0.05 Equity £120m 1.1 The risk-free rate is 3%, and the average return on the market index is 7%. The number of shares outstanding for DV Co is 100m. The corporate and investor tax rates are zero. Modigliani-Miller irrelevance of dividend policy and capital structure holds. What is the weighted average cost of capital (WACC) for DV Co? The company plans to pay a dividend per share of £0.10, which is funded by increasing the company’s long-term debt correspondingly. The new debt has the same beta as the old long-term debt. What is the value per share of the DV Co’s stock on ex-dividend day if the dividend payment goes ahead? What is the beta of the equity on…
ABC Corporation has debt with a value of $100 million and common stock with a market value of $200 million .Investors expect 6% return on the debt and a a 15% return on the stock Assume perfect capital markets. Suppose ABC issues $100 million of new stock to buy back the debt. What is the expected return of the stock after this transaction? Suppose instead ABC corporation issues $50 million of new debt to repurchase stock. what is the expected return of the stock after this transaction,If the risk of the debt does not change? Would the expected return of the stock be higher or lower than in part (i)? If the risk of the debt increases,