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ABC Company, an unleveraged firm, has a total market value of $10 million, consisting of 500,000 shares of common stock selling at $20/share. Management is considering recapitalizing by issuing enough debt so that the firm as a capital structure consisting of 20% debt at a before tax cost of 10%. ABC will use the proceeds to repurchase the stock at the new equilibrium market price. ABC's marginal tax rate is 40%. It has EBIT of $2 million, it expects zero growth in EBIT and pays out all earnings as dividends.
a) Consider ABC's levered beta is 1.15, the risk free rate (Rf) is 7% and the expected market return (Rm) is 12%. What is the new cost of equity under the capital structure financed with 20% debt?
b) Using the new cost of equity, what is the new WACC?
c) What is the new total corporate value of ABC?
Find a mix of ten current call and put options for Apple Inc. (AAPL) with different expiration months and exercise prices. Indicate which options are in the money. Calculate the intrinsic value and time value for each option.
Suppose that IBM stock is selling for $110 per share and that you short sell 200 shares of the stock determine your dollar return if the price of IBM stock drops to $95 per share?
Bob bought some land costing $15,740. Today, that same land is valued at $45,517. How long has Bob owned this land if the price of land has been increasing at 6 percent per year?
Project with the following cash flow. Determine the project's IRR? The project projected IRR can be less that the WACC in which case it will be rejected.
Assume you won the lottery and were offered a choice of either $500,000 in cash or a gamble in which you would get $1 million if a head were flipped but zero if a tail came up.
A corporation has a beta of 1.3. The risk free interest rate today is 8 percent and the return on a market portfolio of stocks is 14 percent.
MMB has common stock has a beta of 1.5. A security analyst forecasts an expected return of 15 percent over the next year. The market risk premium is 8 percent and the risk free rate is 4 percent.
The cost of placing an order is $500. Also history indicates that the average storage cost is $5 month.
Assume large-company stocks returned 11.8 percent on average over the past 75 years. The risk premium on these stocks was 7.9 percent and the inflation rate was 3.2 percent. What was the average nominal risk-free rate of return for those 75 years?
Provide two actual examples of CFOs of publicly-traded corporations who became CEOs of publicly-traded corporationswithin the last 5 years.
Calculate the IRR of each project. Which project should be selected using IRR as the criterion?
You would like to buy a boat and know you can afford boat payments of $225 a month for 5 years. The interest rate is 7.65 percent, compounded monthly. How much money can you afford to borrow?
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