Reference no: EM131064582
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face value that matures in one year. The current market value of the firm's assets is $27,200. The standard deviation of the return on the firm's assts is 35% per year, and the annual risk-free rate is 5% per year, compounded continuously.
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $31,000 that matures in one year. The current market value of the firm's assets is $34,000. The standard deviation of the return on the firm's assets is 39% per year. Suppose Sunburn Suncreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firm's return on assets will have a standard deviation of 21% per year.
*Round all answers to 2 decimal places AND show work please.
A-1: What is the combined value of equity in the two existing companies?
EQUITY $________
A-2: What is the combined value of debt in the two existing companies?
DEBT $__________
B-1: What is the value of the new firm's equity?
EQUITY $__________
B-2: What is the value of the new firm's debt?
DEBT $____________
C-1: What was the gain or loss for shareholders?
GAIN/LOSS $___________
C-2: What was the gain or loss for bondholders?
GAIN/LOSS $___________
|
Taxes should the company change its debt-equity ratio
: MM Tool Manufacturing has an expected EBIT of $67,000 in perpetuity and a tax rate of 35 percent. The firm has $130,000 in outstanding debt at an interest rate of 8 percent, and its unlevered cost of capital is 15 percent. What is the value of the co..
|
|
Value constant growth stock financial analysts forecast
: Value a Constant Growth Stock Financial analysts forecast Safeco Corp.’s (SAF) growth rate for the future to be 8 percent. Safeco’s recent dividend was $0.88. What is the value of Safeco stock when the required return is 12 percent?
|
|
Call option-what must be the risk-free interest rate
: You buy a share of stock, write a one-year call option with X = $12, and buy a one-year put option with X = $12. Your net outlay to establish the entire portfolio is $11.50. What must be the risk-free interest rate %? The stock pays no dividends
|
|
Capital budgeting criteria-ethical considerations
: A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9.66 million at Year 0 to mitigate the envir..
|
|
What was the gain or loss for bondholders
: Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face value that matures in one year. The current market value of the firm's assets is $27,200. What is the combined value of equity in the two existing companies? What is the c..
|
|
The original probability to the risk neutral measure
: Consider a 1 step binomial model of security with S(0) = 120 and r = .05 and P(S(1) = 120) = 1/3 and P(S(1) = 132) = 2/3. Can you find the Risk neutral measure? what is the transformation function τ (Radon-Nikodym Derivative/Girsonov transformation) ..
|
|
When evaluating the addition of the lower-priced shoes
: Foamsoft sells customized boat shoes. Currently, it sells 10,000 pairs of shoes annually at an average price of $70 a pair. It is considering adding a lower-priced line of shoes which sell for $50 a pair. What is the amount of the sales that should b..
|
|
Describe non-tax reason for drafting partnership agreement
: Stipulate and describe at least two tax situations in which a written partnership agreement could be helpful to the partners. Then describe one non-tax reason for drafting a partnership agreement.
|
|
Expected return-standard deviation of your client portfolio
: Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 39%. The T-bill rate is 6%. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. What is the e..
|