7. An all-equity firm has 100 million shares outstanding and $100 million in cash. The firmexpects future free cash flows of $100 million per year. Management plans to use the $100million cash to expand the firm's operations, which will in turn increase future free cashflows by 30%. If the cost of capital of the firm is 20%, and the expansion does not changethe firm's cost of capital, how would a decision to use the cash for a share repurchase insteadof the expansion change the share price?A) Share price will increase by $1.50 per shareB) Share price will decrease by $1.50 per shareC) Share price will increase by $0.50 per shareD) Share price will decrease by $0.50 per shareE) Share price will remain unchanged

Share price refers to the amount that is paid by the investor for purchasing one share from the…

Answered: 7. An all-equity firm has 100 million…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also, the firm has 1,000,000 common shares outstanding with a current market price of GH¢11 per share. Next year’s dividend is expected to be GH¢1 per share and the firm estimates dividends will grow at 5% per year for the next several years. The firm also has 150,000 preferred shares outstanding with a current market price of GH¢10 per share. Dividend of GH¢0.9 per share is paid on preferred stock. The firm has a total of GH¢10,000,000 in debt outstanding. The debt stock is currently valued at of GH¢9,500,000. The yield on the debt is 8%. The firm’s tax rate is 20%. The project requires an initial capital investment of GH¢500,000. However, the project is expected to generate GH¢100,000 annually in perpetuity. Required: Calculate the…
A firm is worth $50 or $180 with equal probability and is financed with debt that has a face value of $60. It is considering a new project that is equally likely to be worth - $50 or +$40. The cost of capital is 12% for all securities. 1. Calculate the present values of the firm’s debt and equity, assuming that the project is not undertaken. 2. What will happen to the value of the firm if the new project is undertaken?
4. Case study A tech industries Inc. has initial resources equal to $150 million. Because management estimates that optimal operation requires an investment of $200 million, the firm must raise an additional $50 million in capital and that amount will be financed through retention of some or all of existing resources rather than distributing to stockholders as dividend. Management projects that the investment of $200 million in time 2 will create $330 million in cash flow at time 2. Assume the market rate of interest is 8% for funds raised. a. If the original stockholders receive none of the initially available resources as a dividend and must raise the entire $50million on carry out the optimal investment program. What is the present value of the Atech Industrial Inc.? b. Suppose that the board of directors decides to pay out to existing stockholders $80 million at time 1 so that only $70 million of the $150 million of the firm's initial resources are available to meet the future…
An all-equity firm will spend $1,500,000 to expand the business. It has $100,000 in cash, can borrow up to $900,000, and can issue up to $1,000,000 in new equity. If the firm applies the pecking order theory of capital structure, what percentage of the expansion will be financed with debt?
Can I get help with....A Security Company produces a cash flow of $210 per year and is expected to continue doing so in the infinite future. The cost of equity capital is 15 percent, and the firm is financed entirely with equity. Management would like to repurchase $100 in shares by borrowing $100 at a 10 percent annual rate (assume that the debt will also be outstanding into the infinite future). Using Modigliani and Miller’s Proposition 1 answer the following questions.What is the value of the firm today? Value of the firm $enter the dollar value of the firm What is the value of equity after the repurchase? Value of the equity $enter the dollar value of the equity What will be the rate of return on common stock required by investors after the stock repurchase? (Round answer to 2 decimal places, e.g. 17.54%.) Rate of return on common stock enter the rate of return on common stock in percentages rounded to 2 decimal places %
You are considering acquiring a firm that you believe will generate cash flows of $100,000 per year for 10 years, after which you are expecting to sell it for $150,000. You will only use equity financing for this project. The beta of the firm is believed to be .75. Of course, you know these cash flows are uncertain. All these cash flows are subject to a 25% corporate tax rate. a) How much is the firm’s worth if the risk-free rate is 5% and the expected market return is 12%? Show your work. b) If the actual beta of the firm turns out to be .50, by how much will you have valued the firm incorrectly? c) If it turns out that you over-projected the cash flows by 2%, by how much will you have valued the firm incorrectly? Show all of your working. Do not use Excel.
You are considering acquiring a firm that you believe will generate cash flows of $100,000 per year for 10 years, after which you are expecting to sell it for $150,000. You will only use equity financing for this project. The beta of the firm is believed to be .75. Of course, you know these cash flows are uncertain. All these cash flows are subject to a 25% corporate tax rate. a) How much is the firm’s worth if the risk-free rate is 5% and the expected market return is 12%? Show your work. b) If the actual beta of the firm turns out to be .50, by how much will you have valued the firm incorrectly? c) If it turns out that you over-projected the cash flows by 2%, by how much will you have valued the firm incorrectly?
The FMS Corporation needs to raise investment money amounting to $40 million in new equity. The firm’s market risk is βM = 1.4, which means the firm is believed to be riskier than the market average. The risk free interest rate is 2.8% and the average market return is 9% per year. What is the cost of equity for the $40 million?
What is the approximate present value of a company with the following stream of free cash flows (FCFs). The weighted average of cost of capital (WACC) is 8% and the company will not change its capital structure. The FCFs are: Year 1 = $8 million The cash flow from Year 1 is expected to grow by 10% in each of Years 2 and Year 3. After that, the cash flow is expected to grow at 5% forever. Question 5 options: a) $290 million b) $280 million c) $270 million d) $310 million
a) One of the touted advantages of an ERM system is the stabilization of revenuethat results in shareholders valuing the business highly on the markets. Assumea firm has operating free cash flows of K300 million, which is expected to grow at13% for four years. After four years, it will return to a normal growth rate of 8%.Assuming that the weighted average cost of capital is 12%. Calculate the valueof the firm. b) A project has a worked out IRR of 15%. Would you advise the companyto undertake this project at its current WACC? Give reasons for youranswer.
A firm is considering a new project which would be similar in terms of risk to its existing projed The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand provide the necessary equity financing for the project. Also, the firm has 1,000,000 common shan outstanding with a current market price of GHe11 per share. Next year's dividend is expected be GHc1 per share and the firm estimates dividends will grow at 5% per year for the next sever years. The firm also has 150,000 preferred shares outstanding with a current market price GH¢10 per share. Dividend of GHe0.9 per share is paid on preferred stock. The firm has a total o GH¢10,000,000 in debt outstanding. The debt stock is currently valued at of GH¢9,500,000. Th yield on the debt is 8%. The firm's tax rate is 20%. The project requires an initial capital investmen of GHc500,000. However, the project is expected to generate GH¢100,000 annually in perpetuity. Required: i Calculate the WACC for this project?…
65.) Suppose Buyson Corporation’s projected free cash flow for next year is FCF1 = P150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company’s weighted average cost of capital is 11.5%, what is the firm’s total corporate value?Group of answer choices P3,150,000 P2,572,125P2,707,500 P2,850,000 P3,000,000

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