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Spectronix Inc. operates in a world of perfect capital markets, has no debt, and has a required 6. rate of return on equity of 10%. An executive manager has suggested that borrowing money to buy back outstanding stock is a good idea because it would replace equity financing with less expensive debt financing, thus increasing the value of the firm. Assume the firm issues new debt with a required return of of 5% to repurchase 30% of the outstanding stock. What is the cost of equity at the conclusion of this transaction?
Tabula, Inc. operates in a mature industry as a “cash cow” and thus pays out all of its earnings as dividends. But it has recently developed a new technology that could provide good growth potential, allowing the firm to earn an 8% return on retained..
Which of the following is the appropriate way to calculate the price of a share of a given company using the free cash flow valuation model?
Last year, California Sushi and Such (CSS) had sales of $65 million. The firm's operating expenses amounted to $20 million and costs of goods sold totalled $15 million. In addition, CSS received $80,000 in dividend income, and paid $300,000 in divide..
The operating cost of a new machine is $500 for the first year. Starting the second year, the operating cost increases by $200 per year for the next 10 years. Calculate the equivalent annual operating cost of the machine. What will be the present and..
What is the differences between the relationship described by the capital market line (CML) and the security market line (SML)? Consider a particular portfolio P with total risk σ p. When will the SML and CML equations give the same Erp?
A bond that matures in 9 years sells for $950. The bond has a face value of $1,000 and a yield to maturity of 9.8764%. The bond pays coupons semiannually. What is the bond's current yield?
Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 3.10%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity, hence the pure expecta..
A firm's overall cost of capital: a. is another term for the firm s internal rate of return. b. is the required return on the total assets of a firm. c. is unaffected by changes in the tax rate. d. is the same as the firm s return on equity. e. varie..
A $1,000 par value bond has 25 years to maturity, a 4% annual coupon, and sells for $1,025. What is the capital gains yield? A. -0.30% B. 0.00% C. 0.06% D. 0.06% E. 0.54%
Define risk, and explain how it is measured. Identify a source of firm-specific risk. What is the source of market risk? Explain what the coefficient of variation measures
Company YUM has 15 million shares outstanding with a market price of $20/per share. The Company YUM has $25million in extra cash (short-term investments) that it plans to use in a stock repurchase. Company YUM has no other financial investments or an..
Six-month T-bills have a nominal rate of 4%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 2%. In the spot exchange market, 1 yen equals $0.005. If interest rate parity holds, what is the 6-month forward exchange ra..
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