# Problem 1 (Issuance and Repurchase in a Modigliani-Miller World)

Save this PDF as:

Size: px
Start display at page:

## Transcription

1 Problem 1 (Issuance and Repurchase in a Modigliani-Miller World) A rm has outstanding debt with a market value of \$100 million. The rm also has 15 million shares outstanding with a market value of \$10 per share. The CEO then announces that the rm will issue a further \$60 million of debt and that proceeds will be used to buy back common stock. Debtholders, seeing the extra risk, mark the value of the existing debt down to \$70 million. The M&M irrelevance theorem holds in this market. (a) How is the market value of the stock a ected by the announcement? (b) How many shares can the company buy back with the \$60 million of new debt that it issues? (c) What is the market value of the rm (equity plus debt) after the change in capital structure? (d) What is the debt ratio after the change in structure? (e) Who (if anyone) gains or loses? Let s work through the rm s balance sheet as it rst issues new debt and then uses the proceeds to buy back common stock. Note though that we will be working with market instead of book values. Initially, the rm s balance sheet is Assets Liabilities Assets in Place 50 Debt 100 Equity 150 Total 50 Total 50 It has some assets in place, worth \$50 million, and these are split between existing debt and equity as speci ed by the problem. Once the rm issues new debt but before it buys back common stock, its balance sheet becomes Assets Liabilities Assets in Place 50 Old Debt 70 Cash 60 New Debt 60 Equity 180 Total 310 Total 310 In addition to the existing assets in place, the rm now has \$60 million in cash on the asset side of its balance sheet. Overall rm value is now \$310 million. Note that this is not a violation of the Modigliani-Miller theorem, because the theorem says that it is the value of assets in place that is not a ected when the rm issues new debt. On the liabilities side we have \$60 million in new debt. Old debt is now worth \$70 million. As the problem states old debt is worth less because of its increased riskiness. Finally, since total liabilities have to equal total assets, equity must be worth \$180 million. Another way to see this is that since new debt 1

2 is issued at a fair price, the value of shareholder equity has to increase by the same amount that the value of existing debt decreases. Since there are still 15 million shares outstanding after the new debt is issued, price per share is P = = \$1: \$60 million The company can buy back \$1 = 5 million shares. Once it buys back 5 million share, the rm s balance sheet is Assets Liabilities Assets in Place 50 Old Debt 70 New Debt 60 Equity 10 Total 50 Total 50 Having used all of its new cash, the rm is now back to having only its existing assets on the asset side of its balance sheet. The values of old and new debt are same as before, and the value of equity is now \$10 million, 10 million shares at \$1 per share. The debt ratio is now Debt = = 0:5 Debt + Equity 50 Overall, existing creditors lose \$30 million, while shareholders gain \$30 million or \$30 15 = \$ per share. Problem (Agency Problems and Debt) There are two states of nature that occur with probability 50% each. The cash ows (F ) of the rm are \$80 and \$40 in each state. Assume that there are not taxes and that this is a risk neutral economy with interest rate equal to 0%. The rm lasts only for one period. Because of ine ciency or theft, the manager throws away half of the cash ows after paying the outstanding debt (D). This loss function (L) can be written as L = max 0; F D The cash ows that are left are distributed as dividends. (a) If the rm is nanced 100% with equity, what is the value of the rm today? If there is only equity, losses in the two states (call the states G and B) are and the value of the rm is L G = 40 L B = 0 V = 0:5 (80 L G ) + 0:5 (40 L B ) = 30

3 We can summarize this in our usual payo table, modi ed to show losses and actual cash ows, B G PV (b) What is the value of the rm if it has outstanding debt of \$50 (promised amount)? The new payo table is B G PV Losses are now L G = 15 L B = 0 and the values of the rm (V ) ; its debt (V D ) and equity (V E ) are respectively V = 0:5 (80 L G ) + 0:5 (40 L B ) = 5:5 V D = 0: :5 40 = 45 V E = 0: :5 0 = 7:5 (c) Assume now that a new project is made available to the rm. The project reports cash ows of \$0 in each state and requires an initial investment of \$9. If the rm only considers equity nancing for this project, would the project be taken if the rm currently has debt for \$50? The new payo table is B G PV Losses are now L G = max ; 0 = L B = max ; 0 = 5 3

4 and rm, debt, and equity values are V = 0:5 (100 L G ) + 0:5 (60 L B ) = 65 V D = 0: :5 50 = 50 V E = 0: :5 5 = 15 Since the rm value increases by (65 5:5) = 1: 5 while the project costs 9; NPV from the perspective of the rm is positive, and if the manager were to maximize rm value he would take the project. However, the NPV to equityholders is (15 7:5) 9 = 1:5 negative because 5 are e ectively transferred to creditors, whose debt becomes risk-free. manager maximizes equityholder s value, he will not accept the project. So, if the (d) Assume now that the rm has debt of \$30 instead of \$50. What is the value of the rm without the project mentioned in (c)? Would the rm take this project if it has the opportunity to invest in it? Before the project is undertaken, rm payo s are as follows B G PV With the new project B G PV Thus once again from the perspective of the rm overall, this is a positive NPV project since rm value increases by (55 45) = 10 while the project costs 9: If the manager were to maximize rm value he would take the project. However, now the project has positive NPV from the perspective of equityholders (5 15) 9 = 1 So, if the manager maximizes equityholder s value, he will accept the project. (e) What mechanisms described by the capital-structure literature are represented in this simple example? The problem shows two concepts related to agency problems. The rst one is the free cash problem: if it is easier for the manager to use cash for his own bene t as long as it is in the rm, the rm will gain by increasing the amount of debt to remove the free cash from the rm. 4

5 However, increasing debt causes a debt overhang problem, which discourages some positive NPV investments since the equityholders do not reap the full bene t of those projects (which are instead captured by the debtholders). Problem 3 (Equity Issues and Information) Consider a market with rms of high and low value of assets in place. All rms are nanced 100% with equity. The owners of each rm know the value of the assets in place, but the market is not sure. At t = 0, the market assigns a probability p to assets in place being of high value (V H = 100), and a probability 1 - p to assets in place being of low value (V L = 40). In the following period t = 1, a new investment opportunity appears and everyone knows about it. This new project yields a cash ow of \$1 and requires an initial investment of \$0.5. Therefore, and assuming that this is a risk-neutral economy with an interest rate of 0%, the NPV of the project is positive and equal to \$0.5. In period t = 1 rms can issue equity to raise funds for the new project. (a) For what range of the probability p the rm with high value of assets in place will decide to issue equity and invest in the new project? Let s start with the pooling equilibrium. The value of equity in the pooling equilibrium is V = 100p + 40(1 p) + 1 The new equityholders are injecting 0:5 of capital into the rm, which means they are going to get a share of the rm equal to 0:5 = 100p + 40(1 p) + 1 so that the existing shareholders will get a share 1 = 1 0:5 100p + 40(1 p) + 1 The high-value rm is now worth So, the high-value shareholders, who know the true value of their claims is 100 without the project, will proceed with the investment only if (1 0:5 ) p + 40(1 p) + 1 ) p :83% (b) Explain why if p = 5% the rm with low value of assets in place decides to issue equity and invest in the new project. Since p = 5% < 15:83% there can be no pooling equilibrium as the high-value rms would not issue equity. Therefore, only the low-value rms will issue, be recognized as such, and invest in the positive NPV project. The reason the low-value rms want to issue and invest is that the market will eventually recognize them to be low-value. Since in the meantime there is no way for these rms to bene t from their temporary overvaluation, they might as well be recognized as low-value sooner rather than later, issue fairly priced equity and invest in the positive NPV project. Thus, existing owners of low-value rms get 40:5 if they issue and invest versus 40 if they don t issue. 5

6 (c) If p = 10%, what is the change in value between t = 0 and t = 1 for the rm that issues new equity? If p = 10%, again high-value rms do not issue equity. At t = 0 low-value rms were not recognized as such, and their value was: V LOW;0 = 100p + 40(1 p) = 46 Now, V LOW;1 = 41 Therefore their values declines by 5: Once again note that even though their value declines by 5 once they issue, the low-value rms do want to issue. Otherwise their value would have eventually declined by (46 40) = 6: Thus they are better o issuing and investing. Problem 4 (Payout Policy in a Modigliani-Miller World) A rm has 1 million shares outstanding with total market value of \$0 million. The rm is expected to pay \$1 million in dividends next year and thereafter the amount paid out is expected to grow by 5% per year in perpetuity. Thus, the expected dividend is \$1:05 million in year, \$1:105 million in year 3 and so on. However, the company has heard that the value of a share depends on the ow of dividends and announces that next year s dividend will be increased to \$ million, and that the extra cash to pay the dividend will be raised by a simultaneous secondary equity o ering. After that, the total amount paid out each year will be as previously forecasted ( \$1:05 million in year and increasing by 5% in each subsequent year). All of the Modigliani-Miller assumptions hold in this market. (a) At what price will the new shares be issued in year 1? At t = 0 each share is worth \$0. This value is based on the expected stream of dividends: \$1 at t = 1, and increasing by 5% in each subsequent year. Thus we can nd the appropriate discount rate for this company as follows P 0 = D 1 r g ) r = D 1 + g = 1 + 0:05 = 0:10 P 0 0 Beginning at t =, each share in the company will enjoy a perpetual stream of growing dividends: \$1:05 at t =, and increasing by 5% in each subsequent year. Thus, the total value of the shares at t = 1 after the t = 1 dividend is paid and after N new shares have been issued is given by 1:05 V 1 = 0:1 0:05 = 1m If P 1 is the price per share at t = 1 then V 1 = P 1 (1m + N) = 1m 6

7 But since the new N shares were issued to raise \$1 million, we know Therefore P 1 = \$0 and N = 50; 000 shares. (b) How many shares will the rm need to issue? P 1 N = 1 With P 1 = \$0 and \$1 million to raise, the rm will sell 50; 000 new shares. (c) What will be the expected dividend payments on these new shares, and what will be paid out to the old shareholders after year 1? The expected dividends paid at t = are \$1:05 million, increasing by 5% in each subsequent year. With 1:05 million shares outstanding, dividends per share are: \$1 at t =, increasing by 5% in each subsequent year. Thus, total dividends paid to old shareholders are: \$1 million at t =, increasing by 5% in each subsequent year. (d) Show that the present value of the cash ows to the current shareholders remains \$0 million. Current shareholders receive the rst dividend of \$ million at t = 1 and then from t = they get their \$1 million that grows at 5% per year. Therefore, the present value is P V 0 = m 1: :1 1m = \$0 million (0:1 0:05) 7

### Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.)

Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.) The primary focus of the next two chapters will be to examine the debt/equity choice by firms. In particular,

### Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public.

Stock Valuation Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by a

### Leverage. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Overview

Leverage FINANCE 35 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University Overview Capital Structure does not matter! Modigliani & Miller propositions Implications for

### a) The Dividend Growth Model Approach: Recall the constant dividend growth model for the price of a rm s stock:

Cost of Capital Chapter 14 A) The Cost of Capital: Some Preliminaries: The Security market line (SML) and capital asset pricing model (CAPM) describe the relationship between systematic risk and expected

### Chapter 1: The Modigliani-Miller Propositions, Taxes and Bankruptcy Costs

Chapter 1: The Modigliani-Miller Propositions, Taxes and Bankruptcy Costs Corporate Finance - MSc in Finance (BGSE) Albert Banal-Estañol Universitat Pompeu Fabra and Barcelona GSE Albert Banal-Estañol

### t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3

MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate

### DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2.

DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%, and investors pay a tax

### TIP If you do not understand something,

Valuing common stocks Application of the DCF approach TIP If you do not understand something, ask me! The plan of the lecture Review what we have accomplished in the last lecture Some terms about stocks

### Part 9. The Basics of Corporate Finance

Part 9. The Basics of Corporate Finance The essence of business is to raise money from investors to fund projects that will return more money to the investors. To do this, there are three financial questions

### CHAPTER 14 COST OF CAPITAL

CHAPTER 14 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this,

### Short-term Financial Planning and Management.

Short-term Financial Planning and Management. This topic discusses the fundamentals of short-term nancial management; the analysis of decisions involving cash ows which occur within a year or less. These

### Capital Structure: Informational and Agency Considerations

Capital Structure: Informational and Agency Considerations The Big Picture: Part I - Financing A. Identifying Funding Needs Feb 6 Feb 11 Case: Wilson Lumber 1 Case: Wilson Lumber 2 B. Optimal Capital Structure:

### Corporate Income Taxation

Corporate Income Taxation We have stressed that tax incidence must be traced to people, since corporations cannot bear the burden of a tax. Why then tax corporations at all? There are several possible

### Chapter 14 Capital Structure in a Perfect Market

Chapter 14 Capital Structure in a Perfect Market 14-1. Consider a project with free cash flows in one year of \$130,000 or \$180,000, with each outcome being equally likely. The initial investment required

### DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #8 Prof. Simon Gervais Fall 2011 Term 2

DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Problem Set #8 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Hors d Age Cheeseworks has been paying a regular cash dividend

### CHAPTER 8 STOCK VALUATION

CHAPTER 8 STOCK VALUATION Answers to Concepts Review and Critical Thinking Questions 5. The common stock probably has a higher price because the dividend can grow, whereas it is fixed on the preferred.

### The cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction

The cost of capital A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction... 1 2. Determining the proportions of each source of capital that will be raised... 3 3. Estimating the marginal

### Chapter 17 Does Debt Policy Matter?

Chapter 17 Does Debt Policy Matter? Multiple Choice Questions 1. When a firm has no debt, then such a firm is known as: (I) an unlevered firm (II) a levered firm (III) an all-equity firm D) I and III only

### DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2.

DUK UNIRSITY Fuqua School of Business FINANC 351 - CORPORAT FINANC Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%. Consider a firm that earns \$1,000

### CHAPTER 15 Capital Structure: Basic Concepts

Multiple Choice Questions: CHAPTER 15 Capital Structure: Basic Concepts I. DEFINITIONS HOMEMADE LEVERAGE a 1. The use of personal borrowing to change the overall amount of financial leverage to which an

### BUS303. Study guide 2. Chapter 14

BUS303 Study guide 2 Chapter 14 1. An efficient capital market is one in which: A. all securities that investors want are offered. B. all transactions are closed within 2 days. C. current prices reflect

### Use the table for the questions 18 and 19 below.

Use the table for the questions 18 and 19 below. The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 1 3 4 5 Price

### TPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 2014 II + III

TPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 2014 II III Instructions 1. Only one problem should be treated on each sheet of paper and only one side of the sheet should be used. 2. The solutions folder

### Homework Assignment #1: Answer Key

Econ 497 Economics of the Financial Crisis Professor Ickes Spring 2012 Homework Assignment #1: Answer Key 1. Consider a firm that has future payoff.supposethefirm is unlevered, call the firm and its shares

### LECTURE- 4. Valuing stocks Berk, De Marzo Chapter 9

1 LECTURE- 4 Valuing stocks Berk, De Marzo Chapter 9 2 The Dividend Discount Model A One-Year Investor Potential Cash Flows Dividend Sale of Stock Timeline for One-Year Investor Since the cash flows are

Review for Exam 1 Instructions: Please read carefully The exam will have 20 multiple choice questions and 4 work problems. Questions in the multiple choice section will be either concept or calculation

Chapter 17 Valuation and Capital Budgeting for the Levered Firm 17A-1 Appendix 17A The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction A leveraged buyout (LBO) is the acquisition

### Stock Dividends. Stock Dividends and Stock Splits. Amount of Stock Dividend. Created in 2006 By Michael Worthington Elizabeth City State University

Stock Dividends and Stock Splits Created in 2006 By Michael Worthington Elizabeth City State University Stock Dividends Stock Dividends consist of additional shares of issued to current stockholders (instead

### Principles of Corporate Finance

Principles of Corporate Finance Chapter 18. Does debt policy matter? Ciclo Profissional 2 o Semestre / 2009 Graduaccão em Ciências Econômicas V. Filipe Martins-da-Rocha (FGV) Principles of Corporate Finance

### CHAPTER 17 Does Debt Policy Matter?

CHPTR 17 Does Debt Policy Matter? nswers to Practice Questions 1. a. The two firms have equal value; let represent the total value of the firm. Rosencrantz could buy one percent of Company B s equity and

### Cost of Capital and Project Valuation

Cost of Capital and Project Valuation 1 Background Firm organization There are four types: sole proprietorships partnerships limited liability companies corporations Each organizational form has different

### Chapter 1 Introduction to Finance

Chapter 1 Introduction to Finance Road Map Part A Introduction to finance. Financial decisions and financial markets. Present value. Part B Valuation of assets, given discount rates. Part C Determination

### MM1 - The value of the firm is independent of its capital structure (the proportion of debt and equity used to finance the firm s operations).

Teaching Note Miller Modigliani Consider an economy for which the Efficient Market Hypothesis holds and in which all financial assets are possibly traded (abusing words we call this The Complete Markets

### 1) Firm value and stock value We demonstrate that maximizing the value of the rm s equity is equivalent tomaximizing the value

Financial Leverage and Capital Structure Policy A) Introduction The objective of the capital structure decision, like any corporate objective, should be to maximize the value of the rm s equity. In this

### MBA Financial Management and Markets Exam 1 Spring 2009

MBA Financial Management and Markets Exam 1 Spring 2009 The following questions are designed to test your knowledge of the fundamental concepts of financial management structure [chapter 1], financial

### You just paid \$350,000 for a policy that will pay you and your heirs \$12,000 a year forever. What rate of return are you earning on this policy?

1 You estimate that you will have \$24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

### Chapter 16 Financial Distress, Managerial Incentives, and Information

Chapter 16 Financial Distress, Managerial Incentives, and Information 16-1. Gladstone Corporation is about to launch a new product. Depending on the success of the new product, Gladstone may have one of

### The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction

Chapter 18 Valuation and Capital Budgeting for the Levered Firm 18A-1 Appendix 18A The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction A leveraged buyout (LBO) is the acquisition

### Practice Problems on Money and Monetary Policy

Practice Problems on Money and Monetary Policy 1- Define money. How does the economist s use of this term differ from its everyday meaning? Money is the economist s term for assets that can be used in

### CHAPTER 5 HOW TO VALUE STOCKS AND BONDS

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS Answers to Concepts Review and Critical Thinking Questions 1. Bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used

### Lecture 15: Final Topics on CAPM

Lecture 15: Final Topics on CAPM Final topics on estimating and using beta: the market risk premium putting it all together Final topics on CAPM: Examples of firm and market risk Shorting Stocks and other

FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended February 1, 2015 (the 2014 fiscal

### Features of Common Stock. The Stock Markets. Features of Preferred Stock. Valuation of Securities: Stocks

Valuation of Securities: Stocks Econ 422: Investment, Capital & Finance University of Washington Eric Zivot Fall 27 January 31, 27 Features of Common Stock Voting rights (Cumulative vs. Straight) Proxy

### 1. What are the three types of business organizations? Define them

Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas

### If you ignore taxes in this problem and there is no debt outstanding: EPS = EBIT/shares outstanding = \$14,000/2,500 = \$5.60

Problems Relating to Capital Structure and Leverage 1. EBIT and Leverage Money Inc., has no debt outstanding and a total market value of \$150,000. Earnings before interest and taxes [EBIT] are projected

### SAMPLE FACT EXAM (You must score 70% to successfully clear FACT)

SAMPLE FACT EXAM (You must score 70% to successfully clear FACT) 1. What is the present value (PV) of \$100,000 received five years from now, assuming the interest rate is 8% per year? a. \$600,000.00 b.

IE Aufgabe 4 The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts 1) Introduction A leveraged buyout (LBO) is the acquisition by a small group of equity investors of a public or private company

### Lecture Notes: Basic Concepts in Option Pricing - The Black and Scholes Model

Brunel University Msc., EC5504, Financial Engineering Prof Menelaos Karanasos Lecture Notes: Basic Concepts in Option Pricing - The Black and Scholes Model Recall that the price of an option is equal to

### Chapter 9 Valuing Stocks

Chapter 9 Valuing Stocks 9-1. Assume Evco, Inc., has a current price of \$50 and will pay a \$2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right

### UNIVERSITY OF WAH Department of Management Sciences

BBA-330: FINANCIAL MANAGEMENT UNIVERSITY OF WAH COURSE DESCRIPTION/OBJECTIVES The module aims at building competence in corporate finance further by extending the coverage in Business Finance module to

### On the Applicability of WACC for Investment Decisions

On the Applicability of WACC for Investment Decisions Jaime Sabal Department of Financial Management and Control ESADE. Universitat Ramon Llull Received: December, 2004 Abstract Although WACC is appropriate

### CHAPTER 18 Dividend and Other Payouts

CHAPTER 18 Dividend and Other Payouts Multiple Choice Questions: I. DEFINITIONS DIVIDENDS a 1. Payments made out of a firm s earnings to its owners in the form of cash or stock are called: a. dividends.

### Cash Flow, Taxes, and Project Evaluation. Remember Income versus Cashflow

Cash Flow, Taxes, and Project Evaluation Of the four steps in calculating NPV, the most difficult is the first: Forecasting cash flows. We now focus on this problem, with special attention to What is cash

### Cash Flow. Summary. Cash Flow. Louise Söderberg, 2010-10-15

Cash Flow Louise Söderberg, 2010-10-15 Summary The statement of cash flow reports the cash generated and used during the time interval specified in its headings. A cash flow analysis is a method of checking

### More Tutorial at Corporate Finance

Corporate Finance Question 1. The cost of capital (8 points) St. Claire Enterprises is a levered firm. The equity cost of capital for St. Claire is 7%. The debt cost of capital for St. Claire is 2%. Assume

### Test3. Pessimistic Most Likely Optimistic Total Revenues 30 50 65 Total Costs -25-20 -15

Test3 1. The market value of Charcoal Corporation's common stock is \$20 million, and the market value of its riskfree debt is \$5 million. The beta of the company's common stock is 1.25, and the market

### Financial Ratio Cheatsheet MyAccountingCourse.com PDF

Financial Ratio Cheatsheet MyAccountingCourse.com PDF Table of contents Liquidity Ratios Solvency Ratios Efficiency Ratios Profitability Ratios Market Prospect Ratios Coverage Ratios CPA Exam Ratios to

### THE FINANCING DECISIONS BY FIRMS: IMPACT OF CAPITAL STRUCTURE CHOICE ON VALUE

IX. THE FINANCING DECISIONS BY FIRMS: IMPACT OF CAPITAL STRUCTURE CHOICE ON VALUE The capital structure of a firm is defined to be the menu of the firm's liabilities (i.e, the "right-hand side" of the

### CFS. Syllabus. Certified Finance Specialist. International benchmark in Finance profession

CFS Certified Finance Specialist Syllabus International benchmark in Finance profession Certified Finance Specialist Summary: This award will provide candidates the opportunity to gain advanced level knowledge

### CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW

CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring

### STUDENT CAN HAVE ONE LETTER SIZE FORMULA SHEET PREPARED BY STUDENT HIM/HERSELF. FINANCIAL CALCULATOR/TI-83 OR THEIR EQUIVALENCES ARE ALLOWED.

Test III-FINN3120-090 Fall 2009 (2.5 PTS PER QUESTION. MAX 100 PTS) Type A Name ID PRINT YOUR NAME AND ID ON THE TEST, ANSWER SHEET AND FORMULA SHEET. TURN IN THE TEST, OPSCAN ANSWER SHEET AND FORMULA

### MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A

MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A Fall Semester 2004 Name: Class: Day/Time/Instructor:. Read the following directions very carefully. Failure to follow these directions will

### Practice Exam (Solutions)

Practice Exam (Solutions) June 6, 2008 Course: Finance for AEO Length: 2 hours Lecturer: Paul Sengmüller Students are expected to conduct themselves properly during examinations and to obey any instructions

### UNC Charlotte Ph.D. in Business Administration Comprehensive Exam Day 2. January 27, 2011

UNC Charlotte Ph.D. in Business Administration Comprehensive Exam Day 2 January 27, 2011 Directions: Today s exam consists of 6 questions. Please answer each question. This exam begins at 11:00am on Thursday,

### Management Accounting Financial Strategy

PAPER P9 Management Accounting Financial Strategy The Examiner provides a short study guide, for all candidates revising for this paper, to some first principles of finance and financial management Based

FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

### Bank Valuation: Comparable Public Companies & Precedent Transactions

Bank Valuation: Comparable Public Companies & Precedent Transactions Picking a set of comparable companies or precedent transactions for a bank is very similar to what you d do for any other company here

### Goals. Stock Valuation. Dividend Discount Model Constant Dividends. Dividend Discount Model Constant Dividends

Stock Valuation Economics 71a: Spring 2007 Mayo 11 Malkiel, 5, 6 (136-144), 8 Lecture notes 4.2 Goals Dividend valuation model dividend discount model Forecasting earnings, dividends, and prices Ratio

### Often stock is split to lower the price per share so it is more accessible to investors. The stock split is not taxable.

Reading: Chapter 8 Chapter 8. Stock: Introduction 1. Rights of stockholders 2. Cash dividends 3. Stock dividends 4. The stock split 5. Stock repurchases and liquidations 6. Preferred stock 7. Analysis

### Chapter 12 Practice Problems

Chapter 12 Practice Problems 1. Bankers hold more liquid assets than most business firms. Why? The liabilities of business firms (money owed to others) is very rarely callable (meaning that it is required

### CHAPTER 9 Stocks and Their Valuation

CHAPTER 9 Stocks and Their Valuation Preferred stock Features of common stock etermining common stock values Efficient markets 1 Preferred Stock Hybrid security. Similar to bonds in that preferred stockholders

### Goals. Stocks. Common Stock. 1. Voting and Control. Stock basics Historical stock performance

Goals Stocks Stock basics Historical stock performance Economics 71a: Spring 2007 Mayo, chapter 10 Lecture notes 4.1 Common Stock Ownership of piece of a firm Key parts Voting rights (control) Dividends

### CHAPTER 22 Options and Corporate Finance

CHAPTER 22 Options and Corporate Finance Multiple Choice Questions: I. DEFINITIONS OPTIONS a 1. A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset

### The Debt-Equity Trade Off: The Capital Structure Decision

The Debt-Equity Trade Off: The Capital Structure Decision Aswath Damodaran Stern School of Business Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable

### THE VALUATION OF A SAVINGS ACCOUNT

THE VALUATION OF A SAVINGS ACCOUNT (With Seven Insights) A savings account is a simple investment that we all understand. We shall use it as a prototype for equity valuation. We shall use it to test ideas

### Corporate Finance: Final Exam

Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. 1. DayTop Inns is a publicly traded company, with 10 million shares

### Chapter 15: Debt Policy

FIN 302 Class Notes Chapter 15: Debt Policy Two Cases: Case one: NO TAX All Equity Half Debt Number of shares 100,000 50,000 Price per share \$10 \$10 Equity Value \$1,000,000 \$500,000 Debt Value \$0 \$500,000

### CIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis

CIS September 2012 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Corporate Finance (1 13) 1. Assume a firm issues N1 billion in debt

### MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the

MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the following 33 questions designed to test your knowledge of the

### Chapter 19. Web Extension: Rights Offerings and Zero Coupon Bonds. Rights Offerings

Chapter 19 Web Extension: Rights Offerings and Zero Coupon Bonds T his Web Extension discusses two additional topics in financial restructuring: rights offerings and zero coupon bonds. Rights Offerings

### Bond Valuation. What is a bond?

Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities called bonds. A bond

### Financial Markets and Valuation - Tutorial 6: SOLUTIONS. Capital Structure and Cost of Funds

Financial Markets and Valuation - Tutorial 6: SOLUTIONS Capital Structure and Cost of Funds (*) denotes those problems to be covered in detail during the tutorial session (*) Problem 1. (Ross, Westerfield

### CHAPTER 11 Reporting and Analyzing Stockholders Equity

CHAPTER 11 Reporting and Analyzing Stockholders Equity Major Characteristics of a Corporation Ownership A publicly held corporation is regularly traded on a national securities market and may have thousands

### The Determinants and the Value of Cash Holdings: Evidence. from French firms

The Determinants and the Value of Cash Holdings: Evidence from French firms Khaoula SADDOUR Cahier de recherche n 2006-6 Abstract: This paper investigates the determinants of the cash holdings of French

### Notes. CIMA Paper P1. Performance Operations

Chapter 5 extract from our ExPress notes for use with the current video. A full set of P1 ExPress notes can be downloaded free of charge at www.. CIMA Paper P1 Performance Operations For exams in 2011

### EMBA in Management & Finance. Corporate Finance. Eric Jondeau

EMBA in Management & Finance Corporate Finance EMBA in Management & Finance Lecture 4: Capital Structure Limits to the Use of Debt Outline 1. Costs of Financial Distress 2. Description of Costs 3. Can

### 1. CFI Holdings is a conglomerate listed on the Zimbabwe Stock Exchange (ZSE) and has three operating divisions as follows:

NATIONAL UNIVERSITY OF SCIENCE AND TECHNOLOGY FACULTY OF COMMERCE DEPARTMENT OF FINANCE BACHELOR OF COMMERCE HONOURS DEGREE IN FINANCE PART II 2 ND SEMESTER FINAL EXAMINATION MAY 2005 CORPORATE FINANCE

### Problem Set 1 Foundations of Financial Markets Instructor: Erin Smith Summer 2011 Due date: Beginning of class, May 31

Problem Set Foundations of Financial Markets Instructor: Erin Smith Summer 20 Due date: Beginning of class, May 3. Suppose the debt holders of a cosmetics firm hold debt with a face value of \$500,000.

### Principles of Financial Management. 3 3 Lecture/Laboratory Hours

COURSE OUTLINE BUS218 Course Number Principles of Financial Management Course Title Credits 3 3 Lecture/Laboratory Hours Course description: Principles of financial management as applied to the firm including

### Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used:

Financial Ratios Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios

### Chapter 13, ROIC and WACC

Chapter 13, ROIC and WACC Lakehead University Winter 2005 Role of the CFO The Chief Financial Officer (CFO) is involved in the following decisions: Management Decisions Financing Decisions Investment Decisions

### Understanding Leverage in Closed-End Funds

Closed-End Funds Understanding Leverage in Closed-End Funds The concept of leverage seems simple: borrowing money at a low cost and using it to seek higher returns on an investment. Leverage as it applies

### How to Calculate Present Values

How to Calculate Present Values Michael Frantz, 2010-09-22 Present Value What is the Present Value The Present Value is the value today of tomorrow s cash flows. It is based on the fact that a Euro tomorrow

### MCQ on Financial Management

MCQ on Financial Management 1. "Shareholder wealth" in a firm is represented by: a) the number of people employed in the firm. b) the book value of the firm's assets less the book value of its liabilities

### Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011. Part One: Multiple-Choice Questions (45 points)

Question 1 Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011 Part One: Multiple-Choice Questions (45 points) Assume that financial markets are perfect and that the market value of a levered

### E cient Credit Policies in a Housing Debt Crisis

Housing Credit E cient Credit Policies in a Housing Debt Crisis Janice Eberly and Arvind Krishnamurthy Kellogg School of Management, Northwestern University, and Stanford GSB May 2015 Housing Credit Introduction