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Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 5,000 shares of stock outstanding, currently worth $20 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta's debt is $25,000. The cost of this debt is 12 percent per annum. Each firm is expected to have earnings before interest of $350,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 12 percent per annum. (Hint: Answers to all the questions below are applications of MM capital structure irrelevance theory in a taxless world)a. What is the value of Alpha Corporation?b. What is the value of Beta Corporation?c. What is the market value of Beta Corporation's equity?d. How much will it cost to purchase 20 percent of each firm's equity?e. Assuming each firm meets its earnings estimates, what will be the dollar return to each position in part (d) over the next year?f. Construct an investment strategy in which an investor purchases 20 percent of Alpha's equity and replicates both the cost and dollar return of purchasing 20 percent of Beta's equity.g. Is Alpha's equity more or less risky than Beta's equity? Explain.
An oil firm arranged a $10,000,000 revolving credit agreement with a group of small banks. The company paid an yearly commitment fee of one-half of one percent of the unused balance of loan commitment.
Suppose on January 1 you deposit $100 in an account that pays a nominal, or quoted interest rate of 11.33463%,with interest added (compounded) daily.
A venture capitalist wants to estimate value of a new venture. The venture is not expected to produce net income or earnings until the end of year five when the net income is estimated at $1,600,000.
Accessing the MD&A Management's Discussion and Analysis of Financial Condition and Results of Operation from the company's most recent Annual Report or Form 10-K,
Starting three months from now, you want to be able to withdraw $1,700 every quarter from your bank account to cover college expenses over the next four years.
Explain the term Bond valuation and What is the annual interest payment on the second issue
Jackie has a margin account with a balance of $45,000. If initial margin requirements are 50% and Turtle Industries is currently selling at $50 each share:
A share of stock sells for $35 today. The beta of stock is 1.2, expected return on market is 12%. The stock is expected to pay a dividend of $0.80 in one year.
Last year Productions pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $0.40 a share for two years commencing four years from today.
How are compounding and discounting related? Explain time value of money.
I have three scenarios and i must identify if they represent a diversifiable or an undiversifiable risk. I have to plan these scenarios in terms of the view point of investors and describe it.
Managers should not focus on current stock price because doing so will lead to overemphasis on short term benefits at expense of long-term profits.
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