EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 14, Problem 24P
a.
Summary Introduction
To determine: The expected ROE with 2% equity.
Introduction:
b.
Summary Introduction
To determine: The expected ROE after an increase in equity to 4%.
c.
Summary Introduction
To determine: The premium of the LV bank after and before the increase in leverage.
d.
Summary Introduction
To determine: The volatility of LV bank after and before the increase in leverage.
e.
Summary Introduction
To find: Whether the reduction in LV bank’s ROE after the increase in equity reduces its attractiveness to shareholders.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity.
Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, 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 the value of Kohwe if it finances the investment with equity?
a. What is the NPV of Kohwe's investment?
The NPV of Kohwe's investment is $
million. (Round to two decimal places.)
b. What is the value of Kohwe if it finances the investment with equity?
The
Kohwe
finances
stment with equity
$
million. (Round
decimal places.)
Establish a finance plan that assumes the sales estimates at the take price level would have been increased by $500,000. This means that the current take price level of $9,170,000 would increase by $500,000. This change would offer more collateral to the bank, and the bank would then increase the GAP loan. The GAP loan requires 200% collateral in unsold rights. This change would impact the equity investment.
Question:
What would be the new equity investment be if the budget stays the same?
Suppose Bank A has $35 million in rate-sensitive assets, $70 million in fixed rate assets, $70 million in rate sensitive liabilities, and $35 million in fixed rate liabilities and equity capital. What is the value of Bank A’s GAP?
Chapter 14 Solutions
EBK CORPORATE FINANCE
Ch. 14.1 - How does the risk and cost of capital of levered...Ch. 14.2 - Why are investors indifferent to the firms capital...Ch. 14.2 - What is a market value balance sheet?Ch. 14.2 - In a perfect capital market, how will a firms...Ch. 14.3 - How do we compute the weighted average cost of...Ch. 14.3 - With perfect capital markets, as a firm increases...Ch. 14.4 - If a change in leverage raises a firm's earnings...Ch. 14.4 - True or False: When a firm issues equity, it...Ch. 14.5 - Consider the questions facing Dan Harris, CFO of...Ch. 14.5 - Prob. 2CC
Ch. 14 - Consider a project with free cash flows in one...Ch. 14 - You are an entrepreneur starting a biotechnology...Ch. 14 - Acort Industries owns assets that will have an 80%...Ch. 14 - Wolfrum Technology (WT) has no debt. Its assets...Ch. 14 - Suppose there are no taxes. Firm ABC has no debt,...Ch. 14 - Suppose Alpha Industries and Omega Technology have...Ch. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Zetatron is an all-equity firm with 100 million...Ch. 14 - Explain what is wrong with the following argument:...Ch. 14 - Consider the entrepreneur described in Section...Ch. 14 - Hardmon Enterprises is currently an all-equity...Ch. 14 - Suppose Visa Inc. (V) has no debt and an equity...Ch. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Hartford Mining has 50 million shares that are...Ch. 14 - Mercer Corp. has 10 million shares outstanding and...Ch. 14 - In mid-2015 Qualcomm Inc. had 11 billion in debt,...Ch. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Yerba Industries is an all-equity firm whose stock...Ch. 14 - Prob. 22PCh. 14 - Prob. 23PCh. 14 - Prob. 24P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- ) You are asked to estimate the RAROC of a bank's $100 million loan business, 7.5% of which is the economic capital. The average interest rate is 8%. All the loans have the same default probability of 1.5% with a loss given default of 60%. Operating costs are $15 million, and the funding cost of the business is $30 million. The economic capital is invested and earns 6%.arrow_forwardSuppose that the assets of a bank consists of $100 million of loans to A rated corporations. The PD for the corporations is estimated as 0,1% and LGD is 60%. The average maturity is 2.5 years for corporate loans. What is RWA?.arrow_forwardShow the complete solution and explanation. Thank you. 1. A company with cost of capital of 15% plans to finance an investment with debt that bears 10% interest. The rate it should use to discount the cash flows isarrow_forward
- a. Global used $19.8 million of its available cash to repay $19.8 million of its long-term debt. (Select the best choice below.) O A. Long-term liabilities would decrease by $19.8 million, and cash would decrease by the same amount. The book value of equity would change by $19.8. B. Long-term liabilities would decrease by $19.8 million, and cash would increase by the same amount. The book value of equity would be unchanged. C. Long-term liabilities would increase by $19.8 million, and cash would increase by the same amount. The book value of equity would be unchanged. D. Long-term liabilities would decrease by $19.8 million, and cash would decrease by the same amount. The book value of equity would be unchanged.arrow_forwardSuppose Bank A has $35 million in rate-sensitive assets, $70 million in fixed rate assets, $70 million in rate sensitive liabilities, and $35 million in fixed rate liabilities and equity capital. Calculate the change in Bank A’s profit as a result of an increase in market interest rates of 2 percentage points.arrow_forwardYour company’s assets have an unlevered value of 25,456,890 USD and the perpetual annual unlevered cash produced is 1,750,000 USD. The Company decides to go through with a recapitalization, after which the debt-to-equity ratio (which the company decides to keep constant) is equal to 2.5. What is the value of debt if the interest rate is 2.45% and the tax rate is 36%?arrow_forward
- A DI has assets of $10 million consisting of $1 million in cash and $9 million in loans. The DI has core deposits of $6 million, subordinated debt of $2 million, and equity of $2 million. Increases in interest rates are expected to cause a net drain of $2 million in core deposits over the year. The average cost of deposits is 6 percent, and the average yield on loans is 8 percent. The DI decides to reduce its loan portfolio to offset this expected decline in deposits. What will be the effect on net interest income and the size of the DI after the implementation of this strategy? If the interest cost of issuing new short-term debt is expected to be 7.5 percent, what would be the effect on net interest income of offsetting the expected deposit drain with an increase in interest-bearing liabilities? What will be the size of the DI after the drain if the DI uses this strategy? What dynamic aspects of DI management would further support a strategy of replacing the deposit…arrow_forwardSuppose SBD Bank has RSA of $150m and RSL of $140m. If interest rates rise by 1 percent on both RSAs and RSLs, what would be the expected annual change in net interest income (ΔNII) based on $GAP? Show your work. ( How a commercial bank’s value would be affected by an increase in economic growth?arrow_forwardTech Corp had gross sales of $9 million and total ex- of $8.5 million. Assume that Tech wants to penses undertake a capital investment of $1 million. What is the minimum amount of bonds it would have to issue to do so? Assume that Tech pays out $300,000 in dividends. Now what is the minimum amount it would have to borrow?arrow_forward
- Use the information presented in Northeastern Mutual Bank's balance sheet to answer the following questions. Suppose the owners of the bank borrow $100 to supplement their existing reserves. This would increase the reserves account and increase/decrease the capital/ debt/ deposit/ loans/ reserves account. This would also bring the leverage ratio from its initial value of 14/ 14.80/ 16.10/ 18.20 to a new value of 14/ 14.80/ 16.10/ 18.20 Which of the following do bankers take into account when determining how to allocate their assets? Check all that apply. The size of the monetary base The total value of liabilities The return on each assetarrow_forward(Capital structure analysis) The Karson Transport Company currently has net operating income of $495,000 and pays interest expense of $196,000. The company plans to borrow $1.07 million on which the firm will pay 9 percent interest. The borrowed money will be used to finance an investment that is expected to increase the firm's net operating income by $395,000 a year. a. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? b. What effect will the loan and the investment have on the firm's times interest earned ratio? a. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? The times interest earned ratio is times. (Round to two decimal places.) Garrow_forwardIf a bank maintains $10 billion in assets with an ROA of 3%, what would happen to the ROE if the leverage ratio fell from 6% to 4% because of an increase in the use of borrowings?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning