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A sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility of the desired size and to attain capacity operations would cost 450 million in present value terms. Alternatively, the company could acquire an existing firm or division with the desired capacity. One such opportunity is the division of another company. The book value of the division's assets is 250 million and its earnings before taxes and tax are presently 50 million. Publicly traded comparable companies are selling in a narrow range around 12 times current earnings. These companies have book value debt to asset ratios averaging 40 percent with an average interest rate of 10 percent.
Referring to the 450 million price tag as the replacement value of the division, what would you predict would happen to acquisition activity when market values of companies and divisions rise above their replacement values? The tax rate is 34%.
Lion's share Inc. just bought a 2.5 million machine that will be depreciated over its 15 year life using straight line depreciation. The marginal tax rate is 35%. What is Lion's share after tax salvage value if the machine is sold in year 7 for 1.75 ..
Shinoda Corp. has 8.82 percent coupon bonds making annual payments with a YTM of 7.08 percent. The current yield on these bonds is 7.68 percent. How many years do these bonds have left until they mature?
Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $31,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $7,750. What are the operating cas..
When the social marginal benefit curve of reduction of pollution is locally flat, which of the following generally makes sense in the presence of uncertainty about costs of reduction? Which of the following are questions answered by public finance? W..
Suppose that a firm has common stock that currently trades for $54.65 in the marketplace, paid an annual dividend last year of $3.25, and has flotation costs of 13.13%. Also, the firm in question had this year $105 million in EBIT, $25 million in int..
At the beginning of the year, a firm has current assets of 397 and current liabilities of 215. At the end of the year, the current assets were 429 and the current liabilities were 255. What is the change in net working capital?
An investor creates a protective put position by buying one share of a stock at $50 and buying a European put option on the stock with strike price $45 at $1.25. What is his profit if he holds his position until maturity of the option and the stock p..
Xerox has a five year, AA rated, zero coupon bond with five years to maturity. 1/3 Bank, Inc. has a much lower bond rating (junk bond) for their five year, zero coupon bond. Which bond will have the lower duration?
Retirement Planning. A recent MBA would like your assist- ance in determining how much to save for retirement. He is planning to invest $3,000 in a tax-sheltered retirement fund at the end of each year (i.e., appreciation of the fund is not taxed).
Using fair value accounting for goodwill, under FAS 141R, determine the amount of goodwill that "the acquiring company" enters on its balance sheet in the following situation: Talmadge Corporation is acquiring the target Tyler, Inc. in a merger. What..
Calculate the required annual payment if the bank's interest rate is 10% and four payments are to be made.- Calculate the required annual payment if the bank's interest rate is 8% and five payments are to be made.
An expected inflation premium is said to be part of the interest rate. What does this mean?- Would one of these mortgages be likely to have a higher interest rate than the other? Explain your answer.
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