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A firm with a normalized pretax income of $40 million, 25% tax rate, and a Total Debt/Total Capital ratio of 30%, decides to undertake a capital expansion financed by new debt. The new level of debt will raise the Total Debt/Total Capital ratio to 40% (5-percentage points above its industry average). As a result, the firm’s credit rating is downgraded by a full level (say for example, from A to B) despite being secured by specific assets. This credit downgrade raises the firm’s Weighted Average Cost of Capital (aka Required Rate of Return) from 10% to 11.5%
What is the value of the firm prior to the downgraded credit rating?
Assuming the firm’s capital expansion program will lead to a 20% increase in normalized pretax income what is the firm’s value in the aftermath of the credit downgrade?
A stock is trading at $70 per share. The stock is expected to have a year-end dividend of $3 per share (D1 = $3), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 12% (assume the market is in ..
Explain the following statement: The standalone risk of an individual corporate project may be quite high, but viewed in the context of its effect on stockholders’ risk, the project’s true risk may be much lower.
What is the Modified Duration of this bond when the market yield is at YTM and explain why and when Modified Duration under-predicts and over-predicts the change in bond price as the market yield changes.
A large retailer obtains merchandise under the credit terms of 3/10, net 35, but routinely takes 65 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's e..
A noncallable Treasury bond has a quoted yield of 4.63 percent. It has a 5.6 percent coupon and 10 years to maturity. What is its dollar price assuming a $1,000 par value?
Identify what the expected return of stock should be for each of the following scenarios. Assume that risk free is 8% and expected return of market is 10%:
Comment on the following quote:"... agency problems do not mean that the corporate firm will not act in the best interest of shareholders, only that is costly to make it do so. However, agency problems can never be perfectly solved ..."
Write a 700- to 1,050-word paper discussing managerial issues associated with managing an organization's IS infrastructure.
1 the value of a financial asset is the .a present value of all of the future cash flows that will be receivedb sum of
Company expects to use $1,600,000 short term credit bus wants a $3,000,00 line of credit in case of unexpected events. LIBOR is 4% and the loan is priced at LIBOR plus 2.5% with Commitment fee of 0.3% on the unused portion of the line. Bank also requ..
Inflation is expected to be 3 percent over the next year. You desire an annual real rate of return of 2.5 percent on your investments. What nominal rate of interest would have to be offered on a one-year Treasury security for you to consider making a..
A trader buys 200 shares of a stock on margin. The price of the stock is $20. The initial margin is 60% and the maintenance margin is 30%. How much money does the trader have to provide initially? For what share price is there a margin call?
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