Reference no: EM132965179

\Questions -

Q1. Virus Defense, Inc. (VDI) borrows $800 million at an interest rate of 7.6%. The company will pay tax at an effective rate of 21%. What is the PV of the interest tax shields if

a) VDI expects to maintain its debt level into the future?

b) VDI expects to repay the debt at the end of 5 years?

c) VDI expects to maintain a constant debt ratio once it borrows the $800 million and rassets= 10%?

Input your answers in $ million, with two decimals

Q2. The market value of the research firm Fixed Facts is $600 million. The firm issues an additional $100 million of stock, but as a result, the stock price falls by 2%. What is the cost of the price drop to existing shareholders as a fraction of the funds raised?

Q3. The equity on the books of Churchill Downs is $20 million and the book value per share is $40. The stock has a market-to-book ratio of 2, and the cost of equity is 14%. The company's bonds have a face value of $10 million and sell at a premium, 115% of face value. The YTM of the bonds is 9%. Churchill Downs' tax rate is 25%. What is the company's WACC?

Q4. Hotel Sunshine, Inc. is a mature business, although it pays no dividends. Next year's earnings are forecast at $56 million. There are 10 million shares outstanding. The company has traditionally used 50% of earnings to repurchase shares of stock and reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 5% per year. Assume the cost of equity is 12%.

a) Calculate the company's current stock price, using the constant growth DCF model. (Hint: start by calculating the total value of outstanding equity.)

b) Sunshine's CFO announces a switch from repurchases to a regular cash dividend. Next year's dividend will be $2.80 per share. The CFO reassures investors that the company will continue to pay 50% of earnings in dividends and reinvest 50%. All future payouts will come as dividends, however. What would you expect to happen to Sunshine's stock price? Ignore taxes. Will the stock price increase, decrease, or remain?

Q5. ?Dish Networks, Inc. had sales of $618 million and a cost of goods sold of $522 million in 2019. Its average inventory was $50 million.

a) What was Dish Networks, Inc.'s average inventory?

b) How much would the value of the company increase if Dish Networks could permanently reduce its average inventory period by 10 days? Assume there are no offsetting costs to this change.