FUND.OF CORP.FIN.(LL)-W/ACCESS >CUSTOM<
11th Edition
ISBN: 9781259898549
Author: Ross
Publisher: MCG CUSTOM
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Chapter 3, Problem 11QP
Summary Introduction
To calculate: The enterprise value-EBITDA (earnings before interest, tax,
Introduction:
The estimated value of the firm’s operating assets is the enterprise value of the firm. The operating asset includes all the assets except cash.
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Homemade Leverage [LO1] The Day Company and the KnightCompany are identical in every respect except that Day is notlevered. Financial information for the two firms appears in thefollowing table. All earnings streams are perpetuities, and neitherfirm pays taxes. Both firms distribute all earnings available tocommon stockholders immediately.Day KnightProjected operating income $ 375,000 $ 375,000Year-end interest on debt — $ 54,000Market value of stock $2,300,000 $1,650,000Market value of debt — $ 900,000An investor who can borrow at 6 percent per year wishes topurchase 5 percent of Knight’s equity. Can he increase hisdollar return by purchasing 5 percent of Day’s equity if heborrows so that the initial net costs of the strategies are thesame?Given the two investment strategies in (a), which willinvestors choose? When will this process cease?
Do solve both parts
Question 9
a) Company A has a present value of £78 million and Company B has a present value of £14 million. Merging the two would enable cost savings with a present value of £5 million. Company A acquires 100% of shares in Company B for £18 million. What do Company B’s shareholders gain from this acquisition?
b) Deepings Company has a P/E ratio of 9.6 and a share price of £1.52. What are the earnings per share of the company?
5. A company has £6 million available and three possible projects, none of which are divisible:
Project
Investment at t0
NPV
S
£1.75m
£0.56m
T
£2.50m
£0.90m
U
£3.75m
£1.30m
Which projects should be undertaken in order to maximise shareholder wealth?
A S and T
B S and U
C T and U
D S, T and U
Chapter 3 Solutions
FUND.OF CORP.FIN.(LL)-W/ACCESS >CUSTOM<
Ch. 3.1 - Prob. 3.1ACQCh. 3.1 - Prob. 3.1BCQCh. 3.2 - Prob. 3.2ACQCh. 3.2 - Name two types of standardized statements and...Ch. 3.3 - What are the five groups of ratios? Give two or...Ch. 3.3 - Given the total debt ratio, what other two ratios...Ch. 3.3 - Turnover ratios all have one of two figures as the...Ch. 3.3 - Profitability ratios all have the same figure in...Ch. 3.4 - Return on assets, or ROA, can be expressed as the...Ch. 3.4 - Return on equity, or ROE, can be expressed as the...
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