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Herculio Mining has net operating income of $5 million; there is $50 million of debt outstanding, with a required rate of return of 6 percent; the required rate of return on the industry is 12 percent; and the corporate tax rate is 40 percent. Assume there are corporate taxes but no personal taxes.
a. Determine the present value of the interest tax shield of Herculio Mining, as well as the total value of the firm.
b. Determine the gain from leverage if personal taxes of 20 percent on stock income and 30 percent on debt income exist.
Dividend valuation with a constant growth model is similar to a growing perpetuity problem. Yield to maturity reflects the current market rate and it is the appropriate discount rate that matches the present value of the bond's cash flow stream and p..
European-style options on foreign currencies trade at the Philadelphia Exchange. A call option on sterling with an exercise price of 0.925 £/$ and a time to expiration of 3 months has a price of 0.0125 £/$. what is the arbitrage profit and what is th..
You own a bond with the following features: 9 years to maturity, face value of $1000, coupon rate of 2% (annual coupons) and yield to maturity of 1.1%. Just after you purchase the bond, the yield to maturity rises to 5.4%. What is the capital gain or..
The Poseidon Swim Company produces swim trunks. The average selling price for one of their swim trunks is $71.85. The variable cost per unit is $27.08, Poseidon Swim has average fixed costs per year of $6,657. Assume that current level of sales is 48..
In the constant dividend growth model, the expected return of a stock is comprised of two components. What are these two components? Which one of the following transactions occurs in the primary market? A particular stock is currently selling for $30..
A share of stock with a beta of .80 now sells for $55. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 3%, and the market risk premium is 6%. If the stock is perceived to be fairly priced today, what must be investors'..
Larry Davis borrows $80,000 at 14 percent interest toward the purchase of a home. His mortgage is for 25 years. a.) How much will his annual payments be? (Although home payments are usually on a monthly basis, we shall do our analysis on an annual ba..
When selecting one of two projects, managers should only consider the total cash flow from each. Most investors prefer greater risk over less risk. Accountants record sales and expenses after the related cash flows occur.
Recently, Google announced that it had closed the acquisition of Nest Labs, an thermostat and smoke detector startup, for $3.2B. Similar to when Facebook acquired Instagram and Whatsapp for $1B and $19B respectively, investors are questioning whether..
As a first step, you perform a liquidity analysis. You then do an analysis of the company's short-term activity ratios. Your calculations and appropriate industry norms are listed.
What is price information asymmetry? Explain the reason for search online purchase offline behavior. How do search sites drive consumers to retailers? What are the benefits of barter?
USE DECIMALS The Taylors have purchased a $190,000 house. They made an initial down payment of $30,000 and secured a mortgage with interest charged at the rate of 8%/year on the unpaid balance. Interest computations are made at the end of each month...
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