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Microsoft Inc. is considering an expansion project. The firm is an all equity firm with a book value of $1,200,000 and the firm has 375,000 shares issued and outstanding. The firm has a tax rate of 40 percent, has just paid its most recent dividend of $3.80 and the firm is expected to grow at 5 percent forever. The return on government T-bills is 3 percent, the return on the market portfolio is 15 percent and the firm has a beta 0.9979. Microsoft has determined the cost of the expansion will be $4,500,000. They have decided to raise the funds by issuing new equity shares through a rights offering. The flotation cost of equity will be 4 percent, and the firm requires that the flotation costs must be covered by the new issue. The new shares will be sold to the existing shareholders at a subscription price of $37.50, which is a discount of the current market price.
a) Calculate the number of rights a shareholder will need to provide when buying a share of the new equity issue.
b) Calculate the value of each right.
c) You own 37,500 of the shares of Mapleton on the announcement date. Calculate your net wealth and ownership position in the company on the announcement date.
How much will your portfolio be worth in 10 years? In 20 years? When you stop working? The Human Resource department at EcoCarnifex Corporation was asked to develop a financial planning model that would help employees address these questions. Frank J..
Pamela earns a yearly salary of $150,000. During year 1 she invested $80,000 for a 20% interest in a passive activity. In addition, her share of the activity’s nonrecourse debt is $20,000. Operations of the activity in year 1 resulted in a loss of $5..
A 10-year bond of a firm in severe financial distress has a coupon rate of 14% and sells for $900. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the..
The initial margin requirement is $3,375 and the maintenance margin requirement is $2,500. Suppose that you bought a contract at $27.42, putting up the initial margin. At what price would you get a margin call?
The Generic Publications Textbook Company sells all of its books for $100 per book, and it currently costs $50 in variable costs to produce each text. The fixed costs, which include depreciation and amortization for the firm, are currently $2 million..
Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y?
Belo Horizonte Company plans to buy back 1.5 million shares of its own stock from its cash reserves at $65 a share. There will be no change in the debt of the company. This will increase the bankruptcy costs by $13 million, due to lower cash reserves..
Netscrape Communications does not currently pay a dividend. You expect the company to begin paying a $4.6 per share dividend in 8 years, and you expect dividends to grow perpetually at 6.1 percent per year thereafter. If the discount rate is 12 perce..
Current T-bill yields are approximately 2 percent.- Based on this information, how much is this investor willing to pay for a three-month T-bill?
Suppose 2-year Treasury bonds yield 5.9%, while 1-year bonds yield 6.8%. r* is 1.75%, and the maturity risk premium is zero. Using the expectations theory, what is the yield on a 1-year bond, one year from now? Calculate the yield using a geometric a..
Suppose your company needs to raise $48 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you’re evaluating two issue alternatives: Calculate the aftertax cash flows for..
Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $34,000 per month for 20 years, with the first payment received 30 years and 1 month from now.
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