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Orange, Inc. is a well-known designer and manufacturer of cell phones, computers, tablets and their associated software and operating systems. Suppose that Orange, Inc. is financed with 100% equity and has a market value of $423 billion. Suppose also that Orange has a WACC of 7%. Investment bankers have approached Orange's CFO and proposed that "Orange take advantage of historically low debt rates" by issuing bonds with a market value of $100 billion and using the proceeds to re-purchase $100 billion in equity from shareholders. Suppose that due to Orange's large free cash flows the bonds would be almost risk free and have a beta of 0.1. Assume that the market risk premium is 5% and the risk free rate is 2%. The investment bankers have used the WACC formula to argue that including debt in Orange's capital structure will "lower its overall cost of capital" from 7% to 5.9% because Orange can issue (almost) risk free debt. This debt, they argue, is much cheaper than equity. That is, their calculation of the ‘new' WACC is:
[The bankers correctly note that while Orange is extremely profitable, its effective tax rate in the U.S. (the relevant jurisdiction) is zero due to a variety of initiatives that the company has taken to shield its income from taxation and therefore does not impact the WACC]. Are the bankers correct that Orange can lower its cost of capital by replacing $100B in equity with $100B in bonds? Please use the WACC formula as the basis of your answer.
Define the three broad purposes for performance management, and provide an example of a situation that relates to each purpose.
Most employees choose to eat their lunch in the cafeteria. Is there an agency cost here and if so, how can management eliminate or reduce this agency cost?
Storico just paid a dividend of $0.45 per share. The company has an ROE of 9% and a book value of $15 per share. The required return on investment is 12%. What is the estimated price of a share of Storico stock?
Three years ago the U. S. dollar equivalent of a foreign currency was $1.2167. Today, the U. S. dollar equivalent of a foreign currency is $1.3310. Determine the percentage change of the euro between these two dates.
b- how many dollars can you get for one swiss franc? c- what is the 3-month forward rate for the swiss franc? d- is the swiss franc selling at a forward premium or discount? e- what is the 90-day forward discount or premium on the swiss franc?
The ccount offers your 5% interest rate compounded annually?
Annual expenses are expected to be: labor of $50,000; $30,000 in rent; $10,000 in equipment depreciation. The tax rate is 35%. Calculate the expected Net Income.
Storico Cleaning, Corporation, had additions to retained earnings for the year just ended of $510,000. The company paid out $130,000 in cash dividends, and it has ending total equity of $6.8 million.
Using the data in the following table, and the fact that the correlation of A and B is .00073, calculate the volatility (standard deviation) of a portfolio that is 60% invested in stock A and 40% invested in stock B.
Friendly's Quick Loans, Inc., offers you $8.25 today but you must repay $10.45 when you get your paycheck in one week (or else).
What is the profitability of the remaining services if all services with losses are dropped?
After that time, they feel the business will be worthless. Marko has determined that a rate of return of 13 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?
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