Exam 14: Capital Structure in a Perfect Market

Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that you borrow $60,000 in financing the project.According to MM proposition II,the firm's equity cost of capital will be closest to:

Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,the cash flow that equity holders will receive in one year in a weak economy is closest to:

Use the information for the question(s)below. Luther is a successful logistical services firm that currently has $5 billion in cash.Luther has decided to use this cash to repurchase shares from its investors,and has already announced the stock repurchase plan.Currently Luther is an all-equity firm with 1.25 billion shares outstanding.Luther's shares are currently trading at $20 per share. -The market value of Luther's non-cash assets is closest to:

Use the information for the question(s)below. You are evaluating a new project and need an estimate for your project's beta.You have identified the following information about three firms with comparable projects: -The unlevered beta for Nod is closest to:

Use the information for the question(s)below. Consider two firms,With and Without,that have identical assets that generate identical cash flows.Without is an all-equity firm,with 1 million shares outstanding that trade for a price of $24 per share.With has 2 million shares outstanding and $12 million in debt at an interest rate of 5%. -Assume that MM's perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying With stock.Using homemade (un)leverage,how much do you need to invest at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock?

Suppose that Taggart Transcontinental currently has no debt and has an equity cost of capital of 10%.Taggart is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock.Assume perfect capital markets.If Taggart borrows until they achieved a debt-to-value ratio of 20%,then Taggart's levered cost of equity would be closest to:

Use the following information to answer the question(s) below. Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of Nielson's assets is $400 million. -The expected return for Nielson Motors stock without leverage is closest to:

Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk-free rate,then the cash flow that equity holders will receive in one year in a strong economy is closest to:

Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk-free rate,then the cash flow that equity holders will receive in one year in a weak economy is closest to:

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. d'Anconia Copper is an all-equity firm with 60 million shares outstanding,which are currently trading at $20 per share.Last month,d'Anconia announced that it will change its capital structure by issuing $300 million in debt.The $200 million raised by this issue,plus another $200 million in cash that d'Anconia already has,will be used to repurchase existing shares of stock.Assume that capital markets are perfect. -The market capitalization of d'Anconia Copper after this transaction takes place is closest to:

Use the information for the question(s)below. Luther Industries has no debt,a total equity capitalization of $20 billion,and a beta of 1.8.Included in Luther's assets are $4 billion in cash and risk-free securities. -What is Luther's enterprise value?

Use the following information to answer the question(s)below. d'Anconia Copper is an all-equity firm with 60 million shares outstanding,which are currently trading at $20 per share.Last month,d'Anconia announced that it will change its capital structure by issuing $300 million in debt.The $200 million raised by this issue,plus another $200 million in cash that d'Anconia already has,will be used to repurchase existing shares of stock.Assume that capital markets are perfect. -Suppose you are a shareholder in d'Anconia Copper holding 500 shares,and you disagree with the decision to lever the firm.You can undo the effect of this decision by:

Which of the following statements is FALSE?

What is a market value balance sheet and how does it differ from a book value balance sheet?

Use the information for the question(s)below. Assume that Rose Corporation's (RC)EBIT is not expected to grow in the future and that all earnings are paid out as dividends.RC is currently an all-equity firm.It expects to generate earnings before interest and taxes (EBIT)of $6 million over the next year.Currently RC has 5 million shares outstanding and its stock is trading for a price of $12.00 per share.RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00. -Following the borrowing of $12 million and subsequent share repurchase,the equity cost of capital for RC is closest to:

Sisyphean Boulder Movers Incorporated has no debt,a total equity capitalization of $50 billion,and a beta of 2.0.Included in Sisyphean's assets are $12 billion in cash and risk-free securities.Calculate Sisyphean's enterprise value and unlevered cost of equity considering the fact that Sisyphean's cash is risk-free.

Use the information for the question(s)below. Luther is a successful logistical services firm that currently has $5 billion in cash.Luther has decided to use this cash to repurchase shares from its investors,and has already announced the stock repurchase plan.Currently Luther is an all-equity firm with 1.25 billion shares outstanding.Luther's shares are currently trading at $20 per share. -After the repurchase how many shares will Luther have outstanding?

Use the information for the question(s)below. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy,with each outcome being equally likely.The initial investment required for the project is $80,000,and the project's cost of capital is 15%.The risk-free interest rate is 5%. -Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,the cash flow that equity holders will receive in one year in a strong economy is closest to:

Show mathematically that the stock price of Rockwood does not depend on whether they issue new stock or borrow to fund their expansion.