EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 14, Problem 6P
Suppose Alpha Industries and Omega Technology have identical assets that generate identical cash flows. Alpha Industries is an all-equity firm, with 10 million shares outstanding that trade for a price of $22 per share. Omega Technology has 20 million shares outstanding as well as debt of $60 million.
- a. According to MM Proposition I, what is the stock price for Omega Technology?
- b. Suppose Omega Technology stock currently trades for $11 per share. What arbitrage opportunity is available? What assumptions are necessary to exploit this opportunity?
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Consider the following security:
Brous Metalworks
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Dividend Payout Rate
0.250
Return on Equity
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Market Capitalization Rate
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Required:
Using the information in the tables above, please calculate the sustainable growth rate, dividends per share, and intrinsic value per share. Then solve for the present value of growth opportunities.
(Use cells A5 to B8 from the given information to complete this question.)
Brous Metalworks
Sustainable Growth Rate
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The following were gathered for estimating the cost of equity of KKK Corporation: Return on Treasury Bonds = 4%; Return on the Market = 10%; Return on KKK Bonds = 6%. Upon analysis, you determined that the beta of KKK shares relating to the market return is 1.2 while a risk premium of 4% should be given to KKK's investors over its creditors.
How much is the cost of equity using the capital asset pricing model?
Use the following information to value a firm’s assets.
Assume the following:
the market value of the firm's assets is expected to remain constant over time so the firm doesn't grow and can be valued as a level perpetuity,
the firm has a constant debt-to-assets ratio,
the bonds are priced at par, and
the stock's expected capital returns are zero.
Relevant data:
The number of shares on issue is 1 million and the number of bonds is 800,000
The constant annual dividend per share is $3
The bonds have an annual fixed coupon payment of $2.50
10-year government bonds have a yield of 2% and the market risk premium is 5%
The beta of levered equity is 1.2
The beta of the bonds is 0.9
Which of the following is the market value of the levered firm’s assets?
a.
$68.3 million
b.
$21.2 million
c.
$70.1 million
d.
$42.9 million
e.
$54.7 million
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
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