Finance Eight Problems

1. [20]

Here are returns:

Stock-AMarket

Yr-114%12%

Yr-21910

Yr-3-16-12

Yr-431

Yr-52015

a. Compute the beta for A.

b. Compute the required rate of return for A.

c. Suppose stock A”s return is 23%, is the stock fairly valued?

2. [14]

Six-Sixty-One Inc. has an optimal capital structure as follows:

Debt$ 45 million

Common Equity$ 100 million

You can sell 30 year, $ 1000 face value,6% coupon bonds at 90% of par value.

The next dividend will be $ 1.50; and shares trade at $ 50. The firm’s growth rate is 10%.The tax rate is 30%.

a. Compute the WACC.

b. Compute the WACC if you think a capital structure of 40% debt and the rest equity is more optimal.

c. In 140 characters or less [TYPED]: why do you compute the cost of capital?

3. [18]

Firms A {unlevered} & B sell Hot Dogs made from rattlesnake.Firm B’s capital structure is different – it has $ 10 million; 5% coupon bonds.

EBIT for the firms is $ 2 million.Cost of equity for A is 10%.

a. In a M&M world – estimate the value for A & B.

b. Compute what the shareholders require as a return for A & B.

4. [8]

Use numbers and show me how a stock split affects the balance sheet of a firm.

5. [10]

Your firm has 25 million shares outstanding and they trade at $ 30.Net Income this year will be $ 3 million.You have $ 15 million to use and you plan to buy-back shares.

a. What is the EPS before and after the repurchase?

b. How many shares trade in the market after the buy back?

6. [18]

MBA Inc.

Market Value of Assets$ 10 million

Face value of pure discount bond$4 million

Debt Maturity3 years

Asset returnσ60%

R_f 5%

Compute market value of debt and equity.Use Table 17.3. DO NOT INTERPOLATE!!!

Show ALL work.

7. [10]

DRAW a payoff diagram:You are an executive and the Board allots you an option to buy 1000 shares at $ 15.Shares trade at $ 10 now.

8. [8]

How does a Dutch auction work?Not more than 4 short sentences.

Why does Underpricing exist?