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In addition, the value of equity for firm A equals the value of equity for firm B, and the variance of returns for firm A and firm B are also equal. Using a risk-free rate of 8%, an appropriate time horizon of five years, and a variance for each firm of 10%, apply the OPM to calculate the value of equity of the two firms before the merger. Under the further assumption that the correlation between the percentage returns on firms A and B is zero, calculate the value of equity and the value of debt of the merged firm, using the OPM.
a) How does the new market value of equity and debt of the merged firm compare with the sum of the values of equity and debt of the constituent firms that combined in the merger?
b) How much additional debt would the merged firm have to issue to restore equity holders to their original position?
To look at the firm's dividend policy, you look at RAD's financial statements for the last year. RAD, in 2013, had net income of $118 million (operating income $1,132 million), capital expenditures of $315.846 million, depreciation and amortization o..
A stock price is currently $80. It is known that in 4 months it will be either $75 or $85. The risk-free interest rate is 5% per year with continuous compounding. Consider a 4-month European call option with a strike price of $80. Compute the risk-ne..
In examining the issue of whether the choice of accounting methods affects stock prices, studies have found that: A. accounting depreciation methods can significantly affect stock prices B. switching depreciation methods can significantly affect stoc..
Stock X has an expected return of 12% and a standard deviation of 8%. Stock Y has an expected return of 8% and a standard deviation of 5%. The correlation coefficient between the returns for X and Y is 0.2. For parts A, B, and C, find expected return..
You have purchased a put option on Pfizer common stock. The option has an exercise price of $44 and Pfizer’s stock currently trades at $46. The option premium is $0.50 per contract. What is your net profit on the option if Pfizer’s stock price does n..
National Steel 20 year, $1000 par value bonds pay 12 percent interest annually. The market price of the bonds is $975, and your required rate of return is 14 percent. Compute the bond's expected rate of return. Determine the value of the bond to you,..
An investment fun had a balance on January 1 of $273,000 and a balance on December 31 of $372,000. The amount of interest earned during the year was $18,000, and the computed yield rate on the fund was 6%. What was the average date for contributions ..
There is a callable preferred stock at 110 par in 9 years, paying $4 annually and having a yield of 6%. Compute its price, if it is called. In case the issuing firm decides to not call it, what would its price be?
Four probable states of the economy may prevail next year. Below are the returns on the stocks of ABC and XYZ companies under each of the probable states and the probabilities for each state. Moderate Growth 20.00% -8.00% 22.00% Given the probabiliti..
The company is choosing between machine A and B (they are mutually exclusive and the company can only pick one). The initial cost of machine A is $400,000 and it will last for 7 years before it needs to be replaced. Which machine is a better choice f..
Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The plant has been experiencing problems as shown by its June contribution format income statement below: Budgeted Actual Sales (3,000 pools) $ 210,000 $ 210,000 Variable ..
Dilwater Furniture purchased a corner lot in Pittsburg five years ago at a cost of $890,000. The lot was recently appraised at $1,070,000. At the time of the purchase, the company spent $80,000 to grade the lot and another $120,000 to pave the lot fo..
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