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Consider two firms A and B that are identical in all respects except capital structure. Firm A has $160 million in equity outstanding and $40 million in bonds outstanding. Firm B has $200 million in equity outstanding and $0 million in bonds outstanding. (a) Suppose an investor has an $8 million investment in the stock of firm A. What alternative $8 million investment that includes firm B’s stock will give the investor the same cash flow payoff in future years as his current investment in firm A’s stock? (Hint: I am looking for the amount of cash you would invest in firm B's stock and the amount of cash you would either invest in other securities or borrow from other sources so that $8 million comes out of your pocket today and you get the exact same cash payoff down the road as the current $8 million investment in firm A’s stock.) (b) Suppose an investor has a $16 million investment in the stock of firm B. What alternative $16 million investment that includes firm A’s stock will give the investor the same cash flow payoff in future years as his current investment in firm B’s stock? (Hint: I am looking for the amount of cash you would invest in firm A's stock and the amount of cash you would either invest in other securities or borrow from other sources so that $16 million comes out of your pocket today and you get the exact same cash payoff down the road as the current $16 million investment in firm B’s stock.)
Yield to maturity Heymann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 10%. What is the yield to maturity at a current market price of $871? Would you pay $871 for ..
A transportation company (Transvan) operates a fleet of 1000 vans with a fleet average fuel economy (FAFE) of 20 miles per gallon (mpg). On the average, each of these vans travels 25,000 miles per year, and is expected to be in service for 5 years. P..
A business executive once stated, “Depreciation is one of our biggest operating cash inflows.” Do you agree? Explain.
The cost of preferred stock is:
How might a bank adjust its credit policies if the area expierneces a sudden or dramatic downturn? Suggest two adjustments the bank should make when applying the five C's of credit in such a situation.
Fama’s Llamas has a weighted average cost of capital of 9.2 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 7.2 percent. The tax rate is 40 percent. What is the company’s target debt−equity ratio?
In the previous problem, suppose you sell the stock at a price of $62. What is your return? What would your return have been had you purchased the stock without margin? What if the stock price is $46 when you sell the stock? You purchase 275 shares o..
Assume that on 1/1/11, the Dow Jones Industrial Average was 11,800. Also assume that on 12/31/11, the Dow is at 12,800. What is the growth rate on the Dow in 2011? If this growth rate continues through 2012, what will be the Dow on 12/31/12?
Which of the following is not needed to prepare a statement of cash flows? What is the first step in calculating cash flows from operations when the indirect method is used? Find net income on the income statement. When the direct method is used to d..
What is an opportunity cost rate and how is this rate used in time value analysis - Is this rate a single number that is used in all situations?
Medium Size Retailers, Inc. (MSR) has EBIT of $300,000, interest expense of $35,000, dividend income of $30,000, short term capital gains of $15,000, and long term capital losses of $20,000. What is MSR’s income tax liability?
You find a bond with 25 years until maturity that has a coupon rate of 10.0 percent and a yield to maturity of 8.5 percent. Suppose the yield to maturity on the bond increases by .25 percent. What is the new price of the bond using duration?
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