Kaplan & Skadden Inc. is a security investment firm. The firm has identified a company with great potential from India and would like to buy and hold its stock for investment. The stock is currently selling for $30 per share, and Kaplan & Skadden thinks it will climb to $120 per share within three years. Draft a memo analyzing how can the firm ensure that any gain it realizes from this transaction will be taxed as long term capital gain
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Kaplan & Skadden Inc. is a security investment firm. The firm has identified a company with great potential from India and would like to buy and hold its stock for investment. The stock is currently selling for $30 per share, and Kaplan & Skadden thinks it will climb to $120 per share within three years. Draft a memo analyzing how can the firm ensure that any gain it realizes from this transaction will be
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- 59) During the coming year, Gold & Gold wants to increase its free cash flow by $180 million, which should result in a higher stock price. The CFO has made these projections for the upcoming year: ∙ EBIT is projected to equal $852 million. ∙ Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million. ∙ The tax rate is 25%. ∙ There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals. What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in FCF? a. $379 b. $219 c. $263 d. $316 e. $175 63) If D 1 = $1.50, g (which is constant) = 6.5%, and P 0 = $56, what is the stock's expected capital gains yield for the coming year? a. 6.50% b. 7.52% c. 7.90% d. 7.17% e. 6.83% 64) Shulman…Axon Industries needs to raise $22.41M for a new investment project. If the firm issues one-year debt, it may haveto pay an interest rate of 9.44 %, although Axon's managers believe that 5.51 % would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 11.26 %. What is the cost to current shareholders of financing the project out of Equity? NOTE: Provide your answers in Millions. E.G. for 100M you must enter 100.0000, for 20M you must enter 20.0000, etc.D6) Suppose there are perfect capital markets with taxes. Investors expect a company to have $120 earnings before interest and taxes in one year. This company has a 25% tax rate, $100 market value of debt, and 20 shares outstanding. This company’s net working capital, depreciation expense, and capital expenditures are all expected to be zero in perpetuity. Investors expect this company to have the same earnings before interest and taxes, market value of debt, tax rate, and number of shares outstanding in perpetuity. The firm’s unlevered cost of equity is 8% and its cost of debt is 5%. Based on this information, what amount would you expect this company’s share price to be closest to? $5 $20 $40 $80 $100 $200 $400
- Halfdome is considering a major expansion program that has been proposed by the company’s information technology group. Before proceeding with the expansion, the company must estimate its cost of capital. Suppose you are an assistant to Jerry Lehman, the financial vice president. Your first task is to estimate Halfdome’s cost of capital. Lehman has provided you with the following data, which he believes may be relevant to your task. *The firm’s tax rate is 25%. *The current price of Coleman’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term, interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. *The current price of the firm’s 10%, $100.00 par value, quarterly dividend, perpetual preferred stock is $111.10. *Halfdome’s common stock is currently selling for $50.00 per share. Its last dividend (D0) was…Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5 million shares outstanding, and has no other assets or opportunities. Suppose the appropriate discount rate for Kohwe's future free cash flows is 8%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is Kohwe's share price today? Suppose Kohwe borrows the $50 million instead. The finn will pay interest only on this loan each year, and maintain an outstanding balance of $40 million on the loan. Suppose that Kohwe's corporate tax rate is 35%, and expected free cash flows are still $9 million each year. c. What is Kohwe's share price today if the investment is financed with debt? Now suppose that with leverage, Kohwe's expected free cash flows wiH decline to $8 million per year due…Assume capital markets are perfect. Kabo Industries currently has $12 million invested in shortterm Treasury securities paying 8%, and it pays out the interest payments on these securitieseach year as a dividend. The board is considering selling the Treasury securities and paying outthe proceeds as a one-time dividend payment.i. If the board went ahead with this plan, what would happen to the value of Kabo stock uponthe announcement of a change in policy?ii. What would happen to the value of Kabo stock on the ex-dividend date of the one-timedividend?iii. Given these price reactions, will this decision benefit investors?
- Memo Corporation is about to launch a new product. Depending on the success of the new product, Memo has an equal probability of being worth $140 million, $125 million, $95 million, or $80 million next year. Assume that Memo is not subject to a tax payment and that its opportunity cost of capital is 5%. a. What is the value of Memo’s equity today if it is 100% financed by equity?Now assume that, instead of being all equity financed, Memo replace some of its equity with zero-coupon debt that has a face value of $100 million which will mature next year. Answer parts b and c under this assumption. b. What is the value of Memo’s debt today? Continue to assume that Memo’s value with be either $140 million, $125 million, $95 million, or $80 million next year, depending upon the success of the new project.c. What is Memo’s total value today, now that it is levered? Briefly explain your results.Suppose Tool Corp. is an unleveraged firm. It has an expected EBIT of 67,000 in Perpetuity and a tax rate of 35%. Its cost of equity is 10.25%. What is Tool Corp’s firm value? (SHOW YOUR WORK)Suppose that Corporation is to consider a new project that requires $0.8 million finance with the interest rate of 10% and is expected to generate additional cash flow of $120,000 each year. In terms of financing, the firm is to borrow the money from David Lee, the owner of the firm. Assuming the cost of capital for all equity firm is 10%, compute the value of this firm if the corporate tax of 50% is imposed.
- 1) Smiley’s Manufacturing Company is considering the purchase of a small business, J&R Raw Material Limited. This company currently earns after-tax cash flow of 250,000 per year. On the basis of a review of similar risk investment opportunities, one must earn a 11% rate of return on the proposed purchase. Please answer the following questions: a. What is the firm’s value if the company’s after-tax cash flows are not expected to grow for the foreseeable future? b. What is the firm’s value if after-tax cash flows are expected to grow at an annual rate of 2.5% for the foreseeable future? c. What price should you pay for J&R Consulting Limited if the after-tax cash flows are not expected to grow for the first two years, but then in year 3 it is expected to grow by 3% and then from year 4 onwards it is expected to grow by a constant annual rate of 4%? d. Your friend, Jenny, is risk averse and is considering which between a government bond investment and the purchase of this…Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital for average-, high-, and low-risk projects? If Congress increased the personal tax rate on interest, dividends, and capital gains but simultaneously reduced the rate on corporate income, what effect would this have on the average company’s capital structure? If a firm goes from zero debt to successively higher levels of debt, why would you expect its stock price to rise first, then hit a peak, and then begin to decline?Turnbull Co. is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 11.1%, $78,000 of preferred stock at a cost of 12.2%, and $880,000 of equity at a cost of 14.7%. The firm faces a tax rate of 40%. What will be the WACC for this project?