Pari Inc., an all-equity firm, has earnings before interest and taxes of $950,000 and an un-levered beta of .80. The firm has 200,000 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume M&M case I, with no taxes and no cost for the risk of default. All general M&M assumptions apply. a) What is the market value of the firm? (2 marks) b) What is the WACC for the firm. (1 mark) c) What is the market value of a share in the company and what is the EPS? (2 marks) d) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? (2 marks) e) What is the new cost of equity? (2 marks) f) According to CAPM, what is the new beta? (2 marks) g) What is the WACC? (2 marks) h) Explain what happens to the market value of the firm and the WACC if the firm increases its debt-to- equity ratio. (1 mark)

Pari Inc., an all-equity firm, has earnings before interest and taxes of $950,000 and an un-levered beta of .80. The firm has 200,000 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume M&M case I, with no taxes and no cost for the risk of default. All general M&M assumptions apply. a) What is the market value of the firm? (2 marks) b) What is the WACC for the firm. (1 mark) c) What is the market value of a share in the company and what is the EPS? (2 marks) d) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? (2 marks) e) What is the new cost of equity? (2 marks) f) According to CAPM, what is the new beta? (2 marks) g) What is the WACC? (2 marks) h) Explain what happens to the market value of the firm and the WACC if the firm increases its debt-to- equity ratio. (1 mark)

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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SATA stock currently sells for RM123. It's expected earnings per share are RM5.12. The average P/E ratio for the industry is 24. If investors expected the same growth rate and risk for SATA as for an average firm in the same industry, it's stock price would Select one: a. stay about the same. b. fall. c. there is not enough information. d. rise.
The Lenzie Corporation's common stock has a beta of 1.80. If the risk - free rate is 4.9% and the expected return on the market is 11%, what is the company's cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) Cost of equity capital %
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Morrison Medical Inc., an all-equity firm, has earnings before interest and taxes of $950,000, an un-levered beta of .80 and a tax rate = 35%. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume a world with taxes and a cost for the risk of default. All general M&M assumptions apply. You have also been provided the following information: Value of Debt Cost of Debt (Rd) Beta PV of Financial Distress Costs $ 0 - .80 0 $ 5,000,000 5.5% ? $800,000 $ 7,000,000 7.0% 2 ? What is the market value of the firm? What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? What is the new cost of equity? According to CAPM, what is the new beta? What is the market value of the firm if the firm issues $7,000,000 in debt? What would be the PV of financial distress costs if…
Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 38.5%, and the current dividend yield is 10.50%. Its beta is 1.37, the market risk premium is 16.50%, and the risk-free rate is 2.30%. a. Use the CAPM to estimate the firm’s cost of equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as a whole percent.)
Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 38.5%, and the current dividend yield is 10.50%. Its beta is 1.37, the market risk premium is 16.50%, and the risk-free rate is 2.30%. a. Use the CAPM to estimate the firm's cost of equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of equity % b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as a whole percent.) Cost of equity % c. Which of the two estimates is more reasonable?
Co Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 34.0%, and the current dividend yield is 6.00%. Its beta is 1.28, the market risk premium is 12.00%, and the risk-free rate is 3.20%. a. Use the CAPM to estimate the firm's cost of equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of equity 12.00 % b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as a whole percent.) Cost of equity 14 % < Prev 4 of 4 Next re to search 立

Morrison Medical Inc., an all-equity firm, has earnings before interest and taxes of $950,000, an un-levered beta of .80 and a tax rate = 35%. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume a world with taxes and a cost for the risk of default. All general M&M assumptions apply. You have also been provided the following information: Value of Debt Cost of Debt (Rd) Beta PV of Financial Distress Costs $ 0 - .80 0 $ 5,000,000 5.5% ? $800,000 $ 7,000,000 7.0% 2 ? What is the market value of the firm if the firm issues $7,000,000 in debt? What would be the PV of financial distress costs if the firm issues $7,000,000 in debt?
S Examine the following book-value balance sheet for University Products Incorporated. The preferred stock currently sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $10 per share and has a beta of 0.9. There are 4 million common shares outstanding. The market risk premium is 8%, the risk-free rate is 4%, and the firm's tax rate is 21%. Assets Cash and short-term securities $ 3.0 Accounts receivable. 3.0 Inventories Plant and equipment Total 7.0 25.0 $ 38.0 a. Market debt-to-value ratio b. WACC BOOK-VALUE BALANCE SHEET (Figures in 5 millions) Liabilities and Net Worth Bonds, coupon 5%, paid annually (maturity 10 years, current yield to maturity = 7%) Preferred stock (par value $20 per share) Common stock (par value $0.10) Additional paid-in stockholders' equity Retained earnings Total a. What is the market debt-to-value ratio of the firm? b. What is University's WACC? Note: For all the requirements, do not round intermediate calculations. Enter your…

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