finance 3

College of Administrative and Financial Sciences

Assignment 3

Principles of Finance (FIN101)

Deadline: End of Week 14 (5/12/2020 @ 23:59)

Course Name: Principles of Finance	Student’s Name:
Course Code: FIN101	Student’s ID Number:
Semester: 1st	CRN:
Academic Year: 1441/1442 H, 1st Term

For Instructor’s Use only

Instructor’s Name:
Students’ Grade: /5	Level of Marks: High/Middle/Low

Instructions – PLEASE READ THEM CAREFULLY

· This assignment is an individual assignment.

· The Assignment must be submitted only in WORD format via the allocated folder on Blackboard.

· Assignments submitted through email will not be accepted.

· Students are advised to make their work transparent and well presented. This also includes filling in your information on the cover page.

· Students must mention question number clearly in their answers.

· Late submitted assignments will NOT be entertained.

· Avoid plagiarism. The work should be in your own words; copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.

· All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).

Submissions without this cover page will NOT be accepted.

Assignment Question(s): (Marks 5)

Q1. American​ Exploration, Inc., a natural gas​ producer, is trying to decide whether to revise its target capital structure. Currently it targets a 50​-50 mix of debt and​ equity, but it is considering a target capital structure with 70​% debt. American Exploration currently has 6​% after-tax cost of debt and a 12​% cost of common stock. The company does not have any preferred stock outstanding. (2 Marks)

a.  What is American​ Exploration's current​ WACC?

b.  Assuming that its cost of debt and equity remain​ unchanged, what will be American Exploration's WACC under the revised target capital​ structure?

c.  Do you think shareholders are affected by the increase in debt to 70​%? If​ so, how are they​ affected? Are the common stock claims riskier​ now?

d.  Suppose that in response to the increase in​ debt, American​ Exploration's shareholders increase their required return so that cost of common equity is 16​%. What will its new WACC be in this​ case?

Q2. What is the significance of voting rights to the ordinary shareholders? What is a proxy? Why do proxy fights occur? (1 Mark)

Q3. Briefly explain the factors that influence the planning of the capital structure in practice. (1 Mark)

Q4. ‘Bonus shares represent simply a division of corporate pie into a large number of pieces.’ Explain. (1 Mark)