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Suppose the corporate tax rate is 40 %40%. Consider a firm that earns $ 2 comma 500$2,500 before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 5 %5%. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? b. Suppose instead the firm makes interest payments of $ 700$700 per year. What is the value of equity? What is the value of debt? c. What is the difference between the total value of the firm with leverage and without leverage? d. The difference in (c) is equal to what percentage of the value of the debt?
You own a 5-year bond with a face value of $1,000 and a coupon rate of 10 percent with annual payments. The bond is currently worth $832.39. If market interest rates remain unchanged, what will be the value of the bond when there is only 1 year left ..
What purpose do loan covenants serve in a debt agreement? What factors should a manager consider when negotiating covenants?
How many shares will each right permit its owner to purchase? What is the intrinsic value of the warrant? What is the speculative premium on the warrant?
Your job pays you only once a year for all the work you did over previous 12 months. How much money will you have on date of your retirement 40 years from today
If it goes down, you will outperform the market but will still have a negative rate of return. What can you do to alleviate your timing risk?
The Smith Pie Company is considering two mutually exclusive investments that would increase its capacity to make strawberry tarts. The firm uses a 12 percent cost of capital to evaluate potential investments. Assume that the cost of replacing A will ..
According to the article "Pitfalls in Evaluating Risky Projects" by James E. Hodder, What are the three pitfalls that can be encountered when the DCF methodis used to make decisions?
(Relative valuation of common stock). Using P/E ratio approach to valuation calculate the value of a share of stock under the following conditions. The investor require rate of return is 13 percent, . the expected level of earnings at the end of this..
What is ri, the required rate of return on Stock i? Round your answer to two decimal places. Now assume that rRF remains at 6% but rM increases to 13%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answe..
Discussion on valuation using multiples of comparable firms. Identify three peers of Apple Inc. Collect the P/E ratio and Enterprise Value / EBITDA ratio for Apple Inc. and its peers. Discuss why the above two multiples differ across the peer firms, ..
Describe the role of interested and disintered directors in corporate governance. What is meant by the principle-agent problem in the context of corporate governance? What are some ways agents can make-self serving decisions? What are some mechanisms..
Assume your cousin purchased five WXO 23 call option contracts at a quoted price of $.34. What is her net gain or loss on this investment if the price of WXO is $28 on the option expiration date?
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