Reference no: EM133764811

Question 1. Why might it make sense for a mature, slow-growth company to have a high debt ratio?

Question 2. A broker wants to sell a customer an investment costing $100 with an page 231 expected payoff in one year of $106. The customer indicates that a 6 percent
return is not very attractive. The broker responds by suggesting the customer borrow $90 for one year at 4 percent interest to help pay for the investment.
What is the customer's expected return if she borrows the money?
Does borrowing the money make the investment more attractive?
What does the irrelevance proposition say about whether borrowing the money makes the investment more attractive?

Question 3. FARO Technologies, whose products include portable 3D measurement equipment, recently had 17 million shares outstanding trading at $35 a share. Suppose the company announces its intention to raise $200 million by selling new shares.
What do market signaling studies suggest will happen to FARO's stock price on the announcement date? Why?
How large a gain or loss in aggregate dollar terms do market signaling studies suggest existing FARO shareholders will experience on the announcement date?
What percentage of the value of FARO's existing equity prior to the announcement is this expected gain or loss?
At what price should FARO expect its existing shares to sell immediately after the announcement?

Question 4. An all-equity business has 100 million shares outstanding selling for $20 a share. Management believes that interest rates are unreasonably low and decides to execute a leveraged recapitalization (a recap). It will raise $1 billion in debt and repurchase 50 million shares. You may ignore taxes for this problem.
What is the market value of the firm prior to the recap? What is the market value of equity?
Assuming the irrelevance proposition holds, what is the market value of the firm after the recap? What is the market value of equity?
Do equity shareholders appear to have gained or lost as a result of the recap? Please explain.
Assume now that the recap increases total firm cash flows, which adds $100 million to the value of the firm. Now what is the market value of the firm? What is the market value of equity?
Do equity shareholders appear to have gained or lost as a result of the recap in this revised scenario?