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Corporate Finance Essay

1391 words - 6 pages

1. A firm has 800,000 shares outstanding at a market price of $120 a share. It wants to raise $10 million via a rights offering. The subscription price is $100 per share. (10 points)

a. How many new shares will they issue? $10million/$100 = 100,000

b. How many rights will be required to buy one share?
800,000 rights/100,000 new shares = 8 rights/share

c. At what price will the stock sell when it goes ex-rights?

New value = 800,000*$120+$10,000,000 = $106,000,000/900,000shares = $117.78

d. What is the value of 1 right? $120-$117.78=$2.22

2. A project has equipment cost of $210. It will have a life of 3 years. The cost will ...view middle of the document...

(5 points)

a. If the rate of return required on this store is 10%, what would your assessment be of the value of the store?

PV=100,000(1.05)/(.1-.05)=$2,100,000

b. What would the growth rate need to be to justify a price of $2.5 million for this store? $2,500,000=100,000(1+g)/(.10-g), g=5.77%

5. The Dinkins Corporation has an expected EBIT of $300,000 and a corporate tax rate of 40 percent. Dinkins uses $1 million of debt financing, and the cost of equity to an unlevered firm is 15%. The personal tax rates of Dinkins’ investors are 30% on debt and 20% on income from stocks. (15 points)
a. What is the value of the firm according to MM in a world with corporate taxes? (No personal taxes)?

Vu=300,000(1-.4)/.15=1,200,000; VL=1,200,000+.4(1,000,000)=1,600,000

b. What is the firm's cost of equity if its debt cost is 10%? V=S+B, S=600,000

Rs=15%+1,000,000/600,000(15-10)(1-.4)=20%

c. What is the firm's value in the Miller model (both corporate and personal taxes)?

VL=1,200,000+(1-(.6*.8)/.7)*1,000,000=1,514,285.71

6. The current market rate of return is 12% and the risk-free rate is 4%. You have been given the job of determining your firm's cost of capital components. The company has 10 million shares outstanding with a current value of $25.00 per share. The debt represents 30% of the capital structure and the yield to maturity is 10%. The ( of the equity is 1.4 and the tax rate is 30%. (15 points)
a. What is the firm's market value of the equity? 10 million*$25=$250,000

b. What is the market value of the firm? .7V=250,000, V=357,142,857.14

c. What is the market value of the debt? V=S+B, B=107,142,857.14

d. What is the required rate of return on equity? Rs=4+1.4(12.4)=15.2%

e. What is the after tax cost of debt to the firm? 10%(1-.3)=7%

f. What is the firm's WACC? RWACC=.3(7)+.7(15.2)=12.74%

7. Trading Post has 220,000 shares outstanding with a par value of $1 per share and a market price of $12.00 per share. On the balance sheet, additional paid-in capital is $540,000, while retained earnings is $275,000. There is no treasury stock and there are no transactions costs. (15 points)

a. What is total owners’ equity for Trading Post?
220,000 + 540,000 + 275,000 = 1,035,000

b. Suppose Trading Post declares a 10% stock dividend. What happens to the common stock (par value) account on the balance sheet?
There are now 242,000 shares at par value $1. Therefore the common stock account =...

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