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Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 15,000 shares of stock outstanding, currently worth $30 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is $65,000, and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of $75,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year. What is the value of Alpha Corporation? What is the Value of Beta Corporation? What is the value of Beta's equity? How much will it cost to purchase 20 % of each company? Assuming each firm meets earnings estimates, what will the dollar return be to each with 20% equity ownership over the next year?
Zappe Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce after-tax cash flows of $35 million per year. Plane B has a life of 10 years, will cost $138 million, and will pro..
If you have your own business how would you develop a short-term financing plan that meets your need for cash? What are some of the major sources of short-term financing you would consider?
Suppose the government announces that, based on a just-completed survey, the growth rate in the economy is likely to be 2 percent in the coming year, as compared to 5 percent for the past year. Will security prices increase, decrease, or stay the sam..
Gabbys garage issued a bond with a 10-year maturity, a $1,000 par value, a 10 percent coupon rate, and semi-annual interest payments. Two years after the bond was issued, the going rate of interest on similar-risk bonds fell to 6 percent. Suppose the..
international trade agreements eliminate trade barriers between countries promote investments infuse competitiveness
In December 1995 Boise Cascade’s stock had a beta of 0.95. The Treasury bill rate at the time was 5.8% and the Treasury bond rate was 6.4%. Assume the term structure of interest gives a 200 bp (basis point – a basis point is 1/100 of a %) spread bet..
One of your corporate clients has approached you about whether or not its employees are required to include certain benefits provided by the corporation in their income. In particular, the corporation has inquired whether the following benefits provi..
What role, if any, should the United Nations play in regards to China strengthening its security while promoting global peace and security?
This planned expansion of the company's present activities would require an investment of $800,000 in equipment having an estimated service life of six years. He has estimated that the equipment could be sold for $40,000 at the beginning of the se..
You have $12,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 11 percent and Stock Y with an expected return of 8 percent. If your goal is to create a portfolio with an expected return of 9.59 percent, how much ..
there can be a good strategy with a bad product and a good product with a bad strategy and this can impact product or
Bond A pays $8,000 in 20 years. Bond B pays $8,000 in 40 years. (To keep things simple, assume these are zero-coupon bonds, which means the $8,000 is the only payment the bondholder receives.)
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