What is the new market value of the company

Reference no: EM131245770

Please answer the following questions:

1. Describe the role that the "winner's curse" may play in the under pricing of IPOs.

2. a. Does a rights offer cause a share price decrease? Why or why not?

b. How are existing shareholders affected by a rights offer? Illustrate your answer with an example.

3. TUV Guy Inc. is proposing a rights offering. There are currently 240,000 shares outstanding at $80 each. There will be 60,000 new shares offered at $60 each.

a. What is the new market value of the company?

b. How many rights are associated with one of the new shares?

c. What is the value of a right?

d. What is the ex-rights price per share?

e. Why might a company have a rights offering rather than a general cash offer?

4. WXYZ Co. has concluded that additional equity financing will be needed to expand operations, and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $50 to $45 ($50 is the rights-on price; $45 is the ex-rights price). The company is seeking $12.5 million in additional funds with a per share subscription price of $25.

How many shares are there currently, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds from the offering.)

5. a. In five sentences or less, briefly explain the M&M Proposition I with taxes. Ensure that you include the appropriate formula in your explanation.

b. What are the two implications of M&M Proposition I with taxes?

c. In five sentences or less, briefly explain the M&M Proposition II with taxes. Ensure that you include the appropriate formula in your explanation.

d. What are the two implications of M&M Proposition II with taxes?

6. Under what conditions of personal and corporate taxation will there be no gain from financial leverage? Explain using the formula

V_L = V_U + [1 - (1-T_C) x (1-T_S)/(1-T_b)] x D

7. VWX Corporation has an EBIT of $166,666.67, a corporate tax rate of 40%, debt of $500,000, and unlevered cost of capital of 20%. The cost of debt capital is 10%.

a. What is the value of VWX's equity?

b. What is the cost of equity capital for VWX?

c. What is the WACC?

d. Compare the WACC of VWX to the WACC of an unlevered firm. What is your conclusion? What principle have you proven in this case?

8. STU's Disco Factory Inc. is financed solely by equity and it is considering issuing debt and using the proceeds to repurchase some of the outstanding shares at the current market price of $30. There are currently 200,000 shares outstanding. EBIT is expected to remain at $1.5 million, with all earnings paid out as dividends. The firm can issue debt at a rate of 8%, and the firm's tax rate is 40%. Three alternative amounts of debt are being considered:

Amount of debt	0	$1,000,000	$2,000,000
Required return on equity	15%	15.5%	16%

Assume that all stock repurchases will be made at $30 per share.

a. Using the M&M Proposition I with taxes, calculate the value of the firm at each debt level.

b. What is the optimum amount of debt?

c. Show that, at the optimum capital structure, the firm also minimizes the WACC.

d. Show that, at the optimum capital structure, the firm also maximizes the price of the outstanding shares.

9. Explain homemade leverage and why it matters.

10. Positive NPV projects enhance shareholder wealth. However, in some cases the payment of dividends limits the number of positive NPV projects a firm can take. Why, then, shouldn't shareholders prefer a residual dividend policy?

11. You own 1,000 shares of stock in ABC Corporation. You will receive a 60 cent per share dividend in one year. In two years, ABC will pay a liquidating dividend of $30 per share. The required return on ABC stock is 15%. What is the current share price of your stock (ignoring taxes)? If you would rather have equal dividends in each of the next two years, show how you can accomplish this by creating homemade dividends.

(Hint: Dividends will be in the form of an annuity.)

Suppose you want only $200 total in dividends the first year. What will yourhomemade dividend be in two years?

12. Suppose we have two equally risky firms, Firm A and B. Firm B's shares are currently worth $100, and they are expected to be worth $120 in one year. Personal dividend tax rate is 30%, and capital gains are exempt from taxes.

a. What is the after-tax return on Firm B?

b. If Firm A opts to pay a dividend of $20 per share in one year, what is the after-tax return on Firm A?

c. Given that dividends will reduce firm value proportionally, what is the share price of Firm A's stock if it pays a dividend of $20 in one year?

Reference no: EM131245770

Questions Cloud

Define in your words a cultural miscalculation : Define in your words a cultural miscalculation. Describe a global cultural miscalculation that has occurred in your business, or one that you have found on the Internet. How could managers handle the situation differently?

Prepare a report with an analysis of your findings : Prepare a report with an analysis of your findings. For exercise 1 provide an analysis of the implications that for the United States may have fact that those specific countries are the top importers and exporters of merchandise.

What form of business organization be best for business : You just inherited $50,000 from a distant (and rich) relative and you want to use that money to open a bakery. Using the material and content discussed in this class: What form of business organization would be best for your business and why? Cons..

Calculate multivariate aic for linear error correction model : Calculate the multivariate AIC for the linear error correction model. How does this value compare to the multivariate AIC for the nonlinear error correction model?

What is the new market value of the company : TUV Guy Inc. is proposing a rights offering. There are currently 240,000 shares outstanding at $80 each. There will be 60,000 new shares offered at $60 each. What is the new market value of the company? How many rights are associated with one of th..

Compare the successes and failures in the field : Research and identify four additional peer-reviewed journal articles that complement the preliminary problem analysis. Compare the successes and failures in the field.

Comment on the relative strengths and weaknesses : Comment on the relative strengths and weaknesses of your analysis of Westfield Corporation (WFC) noting what your analysis has achieved and its limitations.

What is banes weighted average cost of capital : Dividends have grown at the rate of 8 percent per year and are expected to continue to do so for the foreseeable future. What is Bane's weighted average cost of capital where the firm faces a tax rate of 34 percent?

Identify the issue and population effected within industry : Create a general problem statement regarding the topic of interest that is related to the business specialization of your choosing. Identify the issue or problem and the population effected within your selected industry.

User Account

All Pages