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Suppose that firm X is considering entering a business similar to firm Y, a relatively small firm in a single line of business. Firm Y has a beta of 0.80. Debt to Equity ratios and marginal tax rates for firm X and firm Y are shown below.
Firm Debt/Equity Ratio Tax Rate
X 1.6 26%
Y 0.6 37%
What beta would be appropriate for firm X to use in discounting the cash flows of the proposed project?
The M&M theory states it does not make any difference from an economists view whether a firm raises financing as equity or debt. However floatation costs are more for equity than debt and interest on debt is tax deductible whereas dividends are not. ..
Walter Industries has $8 billion in sales and $1.3 billion in fixed assets. Currently, the company's fixed assets are operating at 95% of capacity. If Walter's sales increase 12%, how large of an increase in fixed assets will the company need to meet..
Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 10% annual coupon payment, and their current price is $1,175. The bonds may be called in 5 years at 109% of face value (Call price = $1,..
Prepare a report for the managing director both outlining the theoretical arguments and explaining the real-world influences on the gearing levels of firms.
A deferred annuity makes four equal payments of $129,987 a year starting at the end of year 8. If the interest rate is 12%, what is the present value?
Which one is more risky Intel or GE? Compute the covariance of the two return series. Compute the correlation coefficient of the two return series.
IBM’s stock is currently selling at $ 11.44. This year the firm had earnings per share of $2.80 and the current dividend is $ 0.68. Earnings are expected to grow 7% a year in the foreseeable future. The risk free rate is 10 percent and the expected m..
1. What's MACRS? What's the difference between the MACRS approach and the straight-line approach?
Firms R and S are similar firms in the same industry. Firms R and S have the same profit margin and total asset turnover when compared. However, Firm R's capital structure is 60% debt, 40% equity, and Firm S's capital structure is 30% debt, 70% equit..
Bond X is no callable and has 20 years to maturity, a 8% annual coupon, and a $1,000 par value. Your required return on Bond X is 11%; and if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5, years the yie..
Assume your firm has multiple investments to consider each with differing risk levels. How can differing risk levels be incorporated into NPV analysis? How can they be incorporated into IRR analysis?
A clearly understood investment policy statement is not critical for which one of the following? Defined benefit pension funds. Mutual funds
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