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You own some shares of Microsoft worth $1,000. Beta of Microsoft is 2. Microsoft currently has no debt. Microsoft decides to issue debt and buy back some of its stock in open market.
Specifically, Microsoft decides to buy back 20% of its stock using ALL the proceeds of a new issue of risk-free bonds. Corporate tax rate is zero. You decide to not sell any part of your shares.
After the company is levered, you decide to sell some of your shares and invest the proceeds in risk-free bonds.
You want to do this ‘rebalancing' so that your portfolio (shares+bonds) will have the same beta as the unlevered shares (beta of 2). Effectively, you want to undo the leverage of Microsoft.
What fraction of your money will be invested in risk-free bonds?
Orchard Farms has a pretax cost of debt of 7.68 percent and a cost of equity of 15.2 percent. The firm uses the subjective approach to determine project discount rates. The project has an initial cost of $4.3 million and produces cash inflows of $1.2..
Steve Drake sells rental house on January 1, 2016-receives $120,000 cash and note for $45,000 at 10 percent interest. Steve uses the installment sales method
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Write an equation that defines the yield to maturity on this bond. - If you have the right kind of calculator or software, calculate the yield to maturity.
In other words, the annual operating cash flow is projected to be $67x5,300=$355,100.
Bill asks your advice on how to address his concerns and how to best protect him in the event NIV defaults?
In 2005, Joe who is 75 years old, created a 10 year GRAT into which he transferred $1 million of securities. Joe’s basis in the securities is $250,000. At the time Joe transferred the assets into the GRAT, the IRC Sec. 7520 rate was 4.8%. What is th..
The required rate of return is 10%. What is the share price of the stock today? (Hint: Use an NPVGO approach).
What would the appropriate tax rate be for use in the calculation of the debt component of PDQ’s WACC?
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You borrow $150,000 to buy a house. The mortgage rate is 8.5 percent and the loan period is 30 years. Payments are made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay? (Round the payment to two..
Identify and explain 3 ethical issues related to the ABC Learning collapse - what are the major financial reports? What is the purpose of each report - What are the characteristics of a good internal control system?
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