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In addition, the value of equity for firm A equals the value of equity for firm B, and the variance of returns for firm A and firm B are also equal. Using a risk-free rate of 8%, an appropriate time horizon of five years, and a variance for each firm of 10%, apply the OPM to calculate the value of equity of the two firms before the merger. Under the further assumption that the correlation between the percentage returns on firms A and B is zero, calculate the value of equity and the value of debt of the merged firm, using the OPM.
a) How does the new market value of equity and debt of the merged firm compare with the sum of the values of equity and debt of the constituent firms that combined in the merger?
b) How much additional debt would the merged firm have to issue to restore equity holders to their original position?
Do you agree with this statement? Why or why not? Do you think that a proper country risk analysis can replace a capital budgeting analysis of a project considered for a foreign country? Explain.
The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000. What is, according to the expectations theory, the expected forward rate in the third year?
Diamonds, Etc. manufactures jewelry settings and sells them to retail stores. In the past, most settings were made by hand, and the overhead allocation rate in the prior year was $12 per labor hour ($2,400,000 overhead /200,000 labor hours). Assume t..
You have developed a new a new recreational tennis racket with tennis great Jimmy Connors. You have paid Jimmy Connors for his involvement in the project $250,000. The racket is state of the art and guaranteed to correct any backhand. What will the a..
Bernice first examined Sea Shores Salt most recent balance sheet summarized: Assets: Working Capital $200 Plant and Equipment $360 Other assets $40 Total $600 Liabilities and Net worth Bank Loan $120 Long Term Debt $80 Preferred Stock 100 Common Stoc..
What is the impact on WACC when an organization needs to raise long term capital? vii. What is an Initial Public Offering (IPO)? How does an IPO allow an organization to grow financially? viii. When is a merger or an acquisition, rather than an IPO, ..
Empire Industries is considering adding a new product to their lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 13..
Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent preferred stock outstanding, and 170,000 7.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $3..
Messman Manufacturing will issue common stock to the public for $40. The expected dividend and growth in dividends are $3.50 per share and 3%, respectively. If the flotation cost is 9% of the issue's gross proceeds, what is the cost of external equit..
One of the few determinants of demand that healthcare managers can control is waiting time. Ample evidence indicates that long waits discourage patients and drive up costs. Acton (1975) estimated that the elasticity of demand with respect to waiting ..
Assume that the risk free rate is 6% and the required rate of return on the market is 13%. What is the required rate of return for Sears, which has a beta of 2.0? What is the required return for the overall stock market?
Doublewide Dealers has an ROA of 12%, a 6% profit margin, and an ROE of 19%. What is its total assets turnover? Round your answer to two decimal places. What is its equity multiplier?
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