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Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1–14.3). Suppose she funds the project by borrowing $750 rather than $500. a. According to MM Proposition I, what is the value of the equity? What are its cash flows if the economy is strong? What are its cash flows if the economy is weak? b. What is the return of the equity in each case? What is its expected return? c. What is the risk premium of equity in each case? What is the sensitivity of the levered equity return to systematic risk? How does its sensitivity compare to that of unlevered equity? How does its risk premium compare to that of unlevered equity? d. What is the debt-equity ratio of the firm in this case? e. What is the firm’s WACC in this case?
What is the net present value of a project with the following cash flows if the discount rate is 15 percent?
Alabaster Incorporated wants to be levered at a debt to value ratio of .6 . The cost of debt is 9%. the tax rate is 35% and the cost of equity for an all equity firm is 12%. What will be Alabaster's cost of equity?
The Stanley Stationery Shoppe wishes to acquire The Carlson Card Gallery for $300,000. Stanley expects the merger to provide incremental earnings of about $51,000 a year for 10 years. Ken Stanley has calculated the marginal cost of capital for this i..
A coupon bond which pays interest of $50 annually, has a par value of $1000, mature in 5 years, and is selling today a $114.52 discount from par value. the current yield on this bond is? Stock A has a current price of $40.00, a beta of 2.5, and divid..
Income Property Valuation: Given that a property has the following information: a potential gross income of $1,550,000, net operating income of $900,000, a market capitalization rate of 8.25%, and a market gross income multiplier (GIM) of 11, what is..
Sauer Milk Company is trying to determine its optimal capital structure The following options are under consideration: Which of the plans has the lowest weighted average cost of capital?
The following questions relate to the statement of operations of not for-profit health care organizations. What is the analogous for-profit statement called? What are the main sections of the statement of operations? What are revenues, gains, and oth..
If the yield curve is downward sloping, which of the following statements is correct? (hint: graph the yield curves for a T- bond, a AAA bond, and a B bond)
As a newly hired CEO of the People Trust Co., the first you do is to study the firm’s balance sheet. You find that your firm has $100 million in three-year loans (total assets), $70 million in one-year deposits (total liabilities) and $30 million in ..
Explain how simulation works. What is the value in using a simulation approach and what is sensitivity analysis and what is its purpose?
One year from today, investors anticipate that Groningen Distilleries, Inc, stock will pay a dividend of $3.25 per share. After that, investors believe that the dividend will grow at 20% per year for three years before settling down to a long-run gro..
What is the equivalent payoff of a portfolio consisting of an up-and-in call and an up-and-out call?
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