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Questions:
1. Andrew Inc is presently financed entirely by equity shares. The current market value is $600000. A dividend of $120000 has just been paid. This level of dividends is expected to be paid indefinitely. The project would be financed by issuing $500000 debentures at the market rate of 18%. Ignoring tax consideration:
(i) Calculate the value of equity shares and the gain made by the shareholders if the cost of equity rises to 21.6%.
(ii) Prove that weighted average cost of capital is not affected by gearing.
2. In considering the most desirable capital structure for a company, the following estimates of the cost of debt and equity capital (after tax) have been made at various levels of debt-equity mix:
Debt as a percentage of total capital employed
Cost of debt (%)
Cost of equity (%)
0
5.0
12.0
10
20
12.5
30
5.5
13.0
40
6.0
14.0
50
6.5
16.0
60
7.0
20.0
You are required to determine the optimal capital structure for the company by calculating weighted average cost of capital.
As part of its overall plant modernization and cost reduction program, the management of Tanner-Woods Textile Mills has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was 2..
Explain the concepts of business risk and financial risk. Identify factors that affect each. Explain the concept of financial leverage. Identify advantages and disadvantages of using financial leverage within a company.
If the appropriate interest rate is 10 percent, what kind of deal did the player snag? Assume all payments are paid at the end of the year.
The Poseidon Swim company produces swim trunks. The average selling price for one of their swim trunks is $38. The variable cost per unit is $25. Poseidon swim has average fixed costs per year of $35,194.
Calculate the accounting break-even point on the new machine, as well as the present value break-even point on the new machine.
Professor Shelley is creating a budget for her recently awarded research grant.
A firm is valued at $8 million and has debt of $2 million outstanding. The firm has an equity beta of 1.5 and a debt beta of .60. The beta of the overall firm is:
You recently purchased a stock that is expected to earn 11 percent in a booming economy, 7 percent in a normal economy and lose 3 percent in a recessionary economy. There is a 13 percent probability of a boom, a 74 percent chance of a normal economy...
What is the probability that an investor in this stock will not lose more than 10 percent in any one given year?
Estimate the compound annual dividend growth rate over the six year period of time.
You win a scratch off lottery ticket that promises to pay an initial payment of 10,000 this year, what is the present value of this investment?
computing level of earnings before interest and tax (EBIT) that would make shareholders indifferent between being unlevered-levered
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