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Question - A firm wants to raise $30m to invest in a project. After the $30m investment, the firm will have a total asset value of $100m. The risk-free rate is 10%, and the volatility of the return on assets is 20%.
(a) If the firm wants to issue 10-year debt (zero-coupon), what face value do they need to set?
(b) Now imagine that the bond has been issued (with a face value that you found in the previous part), but that the stockholders can choose an action that changes the nature of the cash flows. Namely, the shareholders can: (1) do nothing, (2) take an action that will immediately reduce the value of the assets from $100m to $99m and at the same time raise the volatility to 30%. Will the shareholders take this action?
(c) If the bondholders anticipated this possibility when they were offered to invest in the company, what do you expect they would have demanded as a face value?
(d) Would the shareholders have an incentive to include a covenant prohibiting the action in part (b) above?
You learned from week 6 that both the money market hedge and the forward hedge lock in the cost of the machinery. What is that cost to the U.S. firm (in dollars) in 6 months? Show your work.
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Calculate the firm's current cost of equity. Estimate the firm's cost of equity after it increases its leverage to 75% of equity.
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Name two industries that have benefited from the growing awareness about health and fitness. Also name two that have been adversely affected by this trend.
A stockbroker calls on potential clients from referrals. For each call, there is a 10% chance that the client will decide to invest with the firm. Fifty-five percent of those interested are found not to be qualified, based on the brokerage firm's ..
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Some people have suggested that it is irrational for a firm to pay dividends and sell new stock in the same year because the cost of newly issued equity is greater than the cost of retained earnings. Do you agree?
You are the new forecast/budget coordinator for your company. The prior budget coordinator was terminated and no one can locate his budget files from the prior.
Jo's Coffee corporation have two stores in Arizona. Their corporate office is planning eliminating the one of their stores due to declining sales.
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