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Suppose firm A and firm B are planning on merging. There are no costs or synergy benefits from the merger. Before the merger firm A has an issue of bonds outstanding. These bonds entitle the holder to a payment of $80 million when the bonds mature next year. Firm B has no debt and the risk free interest rate is 0. (hint- that means you do not need to discount any cash flows) With probability .5 there will be a “boom” in the economy next year and with probability .5 there will be a recession. The value of firm A’s assets and firm B’s assets in a recession and a boom are as follows: “boom” (probability .5) “recession” (probability .5) Firm A asset value $160 million $50 million Firm B asset value $100 million $30 million (a) Using the analysis from class on the coinsurance effects of merging, what will be the change in the value of the bonds if the firm’s merge? (b) Briefly indicate two ways that the firm could solve the problem of the coinsurance effects of merging?
The cost of debt for firm XYZ is 6%. Its tax rate is 40%. The cost of retained earnings is 12% and the cost of external common equity is 14%. Retained earnings are $5000. The target capital structure calls for 45% debt and 55% equity. Compute the opt..
Make a cost comparison between two conveyor systems for transporting raw materials. The service life of each system is 5 years and the write-off period is 5 years. Use straight-line depreciation and assume no salvage value for either system. At what ..
Find the price of the following Bond X The interest rate on the bond is 8%, paid semi-annually and the market yield is 9%. The maturity is 10 years
CRM, Inc. went public one year ago. The company is still in the growth stage, and is expecting supernormal growth of 40% for the next two years before achieving a long-run growth rate of 6%. The stock just paid a dividend of $5.00. If investors’ requ..
Kinkead Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of..
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 10 percent, –10 percent, 17 percent, 22 percent, and 10 percent. What was the variance of Crash-n-Burn’s returns over this period? What was the standard ..
Consider two investments that you can make. You can either buy a share of stock in a company that will pay a dividend of $ 46 every year into the foreseeable future, or a buy a special type of bond that will start paying the same $ 46 in one year, ca..
Irresistible Chips is reviewing its financial condition. Sales are $15,667,426 from which the firm generated an operating profit of $2,445,157 and a net profit after tax of $943,674. The firm’s interest expense was $1,192,195.
Suppose the Japanese yen exchange rate is ¥89 5 $1, and the British pound exchange rate is £1 5 $1.62. What is the cross-rate in terms of yen per pound?
Suppose your company needs to raise $45 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you’re evaluating two issue alternatives: A 6 percent semi-annual coupon bond a..
A 5,000 par value municipal bond with a coupon rate of 2.7 percent has a yield to maturity of 3.9 percent. If the bond has 10 years to maturity, what is the price of the bond? (Round your answer to 2 decimal places. Omit the "$" sign in your response..
Your firm is contemplating the purchase of a new $759,500 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $49,000 at the end of that time. Suppose your required return..
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