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Savvy Supermarkets is a chain of grocery stores that is currently financed with 12.5% debt and 87.5% equity. The CEO of Savvy decides that the proportion of debt in the current capital structure is too low because investors in Savvy’s stock demand a higher rate of return. Savvy issues debt and pays out all proceeds as a special dividend to shareholders. The current rate of return on Savvy’s equity is 16%, only slightly higher than the 14% currently expected on the stock market index. Suppose the risk-free rate is 6% and Savvy has 10 million shares outstanding for a price of $18 per share. For answering the following questions, please assume the Modigliani and Miller assumptions are correct and the CAPM is valid.
a. What is the equity beta and the debt beta of Savvy if the debt has an expected return of 6%?
b. What is the cost of capital of Savvy?
c. Suppose the CEO wishes to realize a target expected return of 20% through leveraging and paying the proceeds as a special dividend. How much debt should the company issue, assuming that all debt can be issued at an expected return equal to the risk-free rate?
You purchase 1,000 shares of Spears Grinders, Inc. stock for $45 per share. A year later, the stock pays a dividend of $1.25 per share, and it sells for $49. Calculate your total dollar return. Calculate your total percentage return.
nternal customers in organizations, Distribution resource planning (DRP), Electronic data interchange (EDI), Stocktaking, inventory policy, Shelf life of products, Limited storage space
International Data Systems information on revenue and costs is only relevant up to a sales volume of 105,000 units. After 105,000 units, the market becomes saturated and the price per unit falls from $14.00 to $8.80. Compute operating income at 105,0..
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,060,000, and it would cost another $24,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold af..
The law firm of Nab-bem and Robb is considering selling stock. It has past dividends of 2011 - $1.15, 2012 - $1.27, 2013 - $1.38, 2014 - $1.47. What should the stock sell for if the required rate of return is 12%?
If a firm permanently borrows $100 million at an interest rate of 8%, what is the present value of the interest tax shield? (Assume that the marginal corporate tax rate is 30%.)
The process through which you built numerous situations in order to get the possible distribution of the NPVs is called:
Winston Enterprises would like to buy some additional land and build a new factory. The anticipated total cost is $148.17 million. The owner of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for..
Determine the optimal hedge ratio for Treasury bonds worth $3,000,000 with a modified duration of 12.45, yielding 11.9 percent if the futures have a price of $90,000, and modified duration of 8.5 years?
Garner-Wagner has a project that produces the following cash flows: CF0 = −3,000,000; CF1−5 = 500,000; and has a discount rate of I/YR = 10. CF0 = −3,000,000; CF1−5 = 500,000; I/YR = 10. If Garner-Wagner goes ahead with this project today, it will ob..
Provide financial evidence that the company is earning economic rents.
You bought a semiannual interest rate cap on $8 million notional with K = 3% (annually, rate quotes are almost always in annual terms). Today is one of the interest settlement dates and you realize that six months ago the (annual) LIBOR rate was 4%. ..
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