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You are analyzing Skates Inc., a firm that manufactures skateboards. The firm is currently unlevered and has a cost of equity of 12%. You estimate that Skates would have a cost of capital of 11% at its optimal debt ratio of 40%. The management, however, insists that it will not borrow the money because of the value of maintaining financial flexibility and has provided you with the following information:
Over the past 10 years, reinvestment (net capital expenditures + working capital investments) has amounted to 10% of firm value, on an annual basis. The standard deviation in this reinvestment has been 0.30. The firm has traditionally used only internal funding (net income + depreciation) to meet these needs, and these have amounted to 6% of firm value.In the most recent year, the firm earned $180 million in net income on a book value of equity of $1 billion, and it expects to earn these excess returns on new investments in the future. The riskless rate is 5%.
a. Calculate the alternative estimating esteem (and show the formula)
b. Estimate the value of financial flexibility as a percent of firm value on an annual basis.
c. Based on (b), would you recommend that Skates use its excess debt capacity?
If the 1-year rate of return is 20% and interest rates are constant, what is the 5-year holding rate of return?- how much will you have in 15 years?
You believe that next year there is a 35?% probability of a recession and 65% probability that the economy will be normal. If your stock will yield negative −9?% in a recession and 23?% in a normal? year, what is the standard deviation of the? stock?
A chooser option is similar to what other type of option strategy
Symantec does not currently pay a dividend, however, in 4 years you expect they will pay their first dividend and it will be $2 per share. The dividend is expected to grow at a rate of 5% and investors’ required rate of return for Symantec stock is 1..
Abebi, who has just celebrated her 28th birthday, will retire on her 58th birthday, and she has just set up a retirement plan to pay her income starting on her retirement day, and to continue paying for 19 more years. Abebi's goal is to receive $110,..
Conversion price $52/share Coupon rate 6.5% Par value $1,000 Yield on nonconvertible debentures of same quality 8.5% Maturity 25 years Market price of stock $42 /share 23. If the price of the convertible bond is $900, what is the value of the call op..
The risk-free rate of return is 4.2 percent and the market risk premium is 11 percent. What is the expected rate of return on a stock with a beta of 1.8?
A finance company has rate-sensitve assets of $20 million and rate-sensitive liabilities of $15 million. Should it be an interest-rate swap buyer (and make fixed-rate payments) or seller (and make variable-rate payments? Explain.
XYZ Corp. has an 8 percent preferred stock that is currently selling for $120 per share. If the par value is $100, what is the cost of preferred stock to the firm?
A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)?..
Currently, Apple stock is trading at $132.54. The 1-month $130 Apple call option is trading at $4.55. Assume the risk-free rate is 0.15% (not 15%). Find the implied volatility.
Compare and contrast the potential liability of owners of proprietorships, partnerships (general partners), and corporations.
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