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- H3. The value of HILEV firm at the end of one year can be $50 m or $100 m with equal probability of 0.5. The firm has debt with a face value of $50 m that matures in one year. Assume that investors are risk-neutral and the risk free rate is zero. The CEO of the firm decides to substitute assets of the firm with more risky assets immediately, so that the value of the firm at the end of one year is either $30 m or $120 m with equal probability of 0.5. This asset substitution will lead to A. A gain of $10 million for stockholders and a loss of $10 million for bondholders B. A loss of $10 million for stockholders and a gain of $10 million for bondholders C. No gain or loss to debtholders or equity holders D. Both debtholders and equity holders will lose $10 million from the increased risk of the business Show proper step by step calculationD3) Red See Industries is expected to pay a cash dividend of $2.31 per share next year (D1) The company is quite risky; its required return is 22 percent and PPS0 =$19.25. What is this year’s (at t=0) cash dividend, assuming a constant growth rate in cash dividends until infinity? a. $2.31 b. $2.80 c. $3.18 d. $3.45 e. None of the above, the answer is $________ . With calculationsQ.A company will earn net profits of $100,000 if the economy booms (probability of 80%) and net profits of $60,000 if the economy enters a recession (probability of 20%). The company wants to take out a loan for $74,000 to finance its operations.Treasuries of the same maturity offer an interest rate of 6%. Assume risk neutrality. A)What payoff would the bank receive if it invested $74,000 in Treasuries? B)What payout should the bank be looking for during the boom (in $)? C)What interest rate should the bank quote?
- D4) Consider a firm with zero-coupon bonds that mature in 1 year and combined face value of $100,000. The market value of the firm's assets is $95,000 and the standard deviation of returns of the assets is 15%. The risk-free rate is continuously compounded 6%. What is the value of the equity? Answer: $6,076 How to get this answer please!9 Kale Inc. forecasts the free cash flows to the firm (in millions) shown below. If the weighted average cost of capital is 11.0%, cost of equity is 16%, and FCF to the Firm is expected to grow at a rate of 5.0% after Year 2, what is the firm’s total corporate value, in millions?. Year 1 2 Free cash flow -P30 P130 Group of answer choices P1,686 P1,770 P1,925 P1837 P993 P1,456 P1,529 P1,606Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return. Current Proposed Assets $10,000 $18,000 Debt $0 $8,000 Equity $10,000 $10,000 Debt/Equity ratio 0.00 1.00 Interest rate n/a 7% Shares outstanding 500 500 Share price $20 $20 (b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued.
- F2 You are analyzing a valuation done on a stable firm by a well-known analyst. Based on the expected free cash flow to firm next year of $30 million and an expected growth rate of 5%, the analyst has estimated a value of $750 million. You know that the firm has a cost of equity of 14% and an after-tax cost of debt of 6%. What is the weight of equity that the analyst has used? 37.5 % 42.5 % 50 % 57.5 % ANSWER IS 37.5%Q3) Tanten Company has 200% debt and 80% equity. The borrowing rate is 12%. A. If you own 4% of the stock of Abacus, what is your dollar return if the company has net operating income of $750,000 and the over all capitalization rate , Ko, is 15%? Value of the firm is 500,000 B. What is the implied required rate of return on equity? C. What is the market value of stock and the return of stock? D. What is the market value of debt?Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return. Current Proposed Assets $10,000 $18,000 Debt $0 $8,000 Equity $10,000 $10,000 Debt/Equity ratio 0.00 1.00 Interest rate n/a 7% Shares outstanding 500 500 Share price $20 $20 (a) If the required rate of return on unlevered equity is 10%, fill out the following table for the company before the debt is issued: Recession Expected Expansion EBIT $500 $1,000 $1,500 Interest…
- G Corps’ free cash flow was just FCF0 = $1.32 (Millions) Analysts expect the company's free cash flow to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The WACC for this company 9.00%. D has $4 million in short-term investments and $14 million in debt and 1 million shares outstanding. What is the stock price at year 2? What is the best estimate of the stock's current intrinsic price? If the market price is $33, do you buy or sell?Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return. Current Proposed Assets $10,000 $18,000 Debt $0 $8,000 Equity $10,000 $10,000 Debt/Equity ratio 0.00 1.00 Interest rate n/a 7% Shares outstanding 500 500 Share price $20 $20 (e ) If the company stock price goes up by 2% from announcing it is adding debt to expand the business, what effect does this have on the WACC?Q4. The cash flows are given below of XYZ. After the 3rd year FCF is expected to grow at a constant 7.5% rate.WACC is 13%. It has $10 million in short term investments, $100 million debt, and 10 million shares of stock. Whatis the intrinsic price per share i.e. Po?
