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ABC Inc. reported EBIT of $2000 million. It also reported depreciation of $500 million and capital spending of $1.3 billion, working capital requirements are $100 million. The firm has $5.5 billion in debt outstanding, currently trading at par, rated AA with a yield to maturity of 9%. The beta of the stock is 1.25, and there are 300 million shares outstanding trading at $50 per share, with a book value of $7 billion. The Treasury bond rate is 5%, the market risk premium is 6% and the corporate tax rate is 32%.
a. Estimate the current free cash flow to the firm.
b. What is the expected growth of operating income?
c. What is the cost of capital of ABC Inc.?
d. Estimate the value of ABC Inc.
e. Estimate the value of equity of ABC Inc.
f. Based on your estimation, what is the value of equity on a per share basis? Is ABC Inc. correctly priced by the market? State an example of trading strategy you can use to take advantage of any current market mispricing.
The bonds pay 10 percent annual interest. The yield to maturity (market rate of interest) is 12 percent. The bonds have a 10-year maturity.
Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for pusrposes of this comparison.
An investment will pay $200 at the end of each of the next 3 years, $300 at the end of Year 4, $600 at the end of Year 5, and $700 at the end of Year 6.
Suppose the expected return on the market portfolio is 15% and the riskless return is 9 percent. Also assume that all of the projects listed here are perpetuities with annual cash flows and betas as indicated.
If the default risk of corporate bonds decreases, what will happen to the demand for corporate bonds, the price of corporate bonds, the demand for treasuries, and the price for treasuries?
Dividends have grown at the rate of 4.6% per year and are expected to continue to do so for the for the foreseeable future. What is Cryton's cost of capital where the firms tax rate is 30%?
Dave and Karen King are a two-income couple in their early thirties. They have two children, ages 6 and 3. Dave's monthly take-home pay is $3,600, and Karen's is $4,200. The Kings want to decide how much additional insurance they would need, i..
How many shares of stock should the company sell, and buy back bonds from the proceeds, to attain its optimal capital structure?
Define, explain Customer Relationship Management Systems (CRM) and the benefits of CRM
During the most recent fiscal year, a firm earned revenues of $10,000,000 and net income of $2,000,000.
Black-Scholes ModelCurrent stock price = $15 Strike price of option = $13 Time to maturity of option = 3 months
What causes the change in optimal strategy when taxes are added back to the m&m theorem?
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