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The management of Hyperreality Investment Fund believes that publicly traded companies have suboptimally high leverage ratios. Stock prices are contaminated by debt to such an extent that their excessive sensitivity to public and private information hinders fundamental analysis and risk management. Hyperreality just hired Jean Baudrillard, who is going to create a hyperreal portfolio of assets, where each asset mimics a company’s return as if this company had no debt. Since such an asset mimics the company that does not exist (exists only in Hyperreality), Jean decided to call it a simulacrum.
For example, consider a company that is worth $500M, $200M of which is financed through debt with the cost of 10%. Suppose that Hyperreality is a well-established investment fund and Jean can borrow and lend at 10% interest rate. Jean has $60,000 to invest in the debt-free version (simulacrum) of this company.
a) How much should be invested in the existing company’s equity?
b) How much should be lent or borrowed?
c) Suppose the company generates EBIT of $100M and distributes all of it among debtholders and shareholders. How much would Jean earn? Ignore taxes.
Consider exchange-traded call option contract to buy 500 shares with strike price of $40 and maturity in four months.The buyer of put option contract.
Compute and interpret the Z-score for each firm.
Maggie's Muffins, Inc., generated $4,000,000 in sales during 2013, and its year-end total assets were $2,800,000. Also, at year-end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and ..
An investor has an opportunity to buy a parcel of land for $350,000. He plans to sell it in two years. What will the sale price have to be for the investor to get a 23% constant dollar before-tax ROR with inflation averaging 12% annually?
Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 24% for two years and then at 6% thereafter. If the required return for Deployment Specialists is 10.0%, what is the intrinsic value of Deployment Specialists st..
Make a short external analysis based on The External Environment
Company Wii gives you the following information for its operation. The expected income available for dividends is $42 million next year before the firm has any debts. Suppose there is a 25% corporate income tax imposed on the company. What is the co..
Joe's retirement scheme at work pays $500 at the end of each month. Carol has $184,465.8246 more than Joe at this time.
Historical costs are all of the following except that they:
According to the conversative current asset financing policy:
Use both the TVM equations and a financial calculator to find the following values. Round your answers to the nearest cent. (Hint: Using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown var..
You own two bonds. Both bonds pay annual interest, have 8 percent annual coupons, $1,000 face values, and currently have 8 percent yields to maturity.
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