1. [20] Here are returns: Stock-A Market Yr-1 14% 12% Yr-2 19 10 Yr-3 -16 -12 Yr-4 3 1 Yr-5 20 15 a. Compute the beta for A. b. Compute the required rate of return for A. c. Suppose stock A”s return is 23%, is the stock fairly valued? 2. [14] Six-Sixty-One Inc. has an optimal capital structure as follows: Debt $ 45 million Common Equity $ 100 million You can sell 30 year, $ 1000 face value, 6% coupon bonds at 90% of par value. The next dividend will be $ 1.50; and shares trade at $ 50. The firm’s growth rate is 10%. The tax rate is 30%. a. Compute the WACC. b. Compute the WACC if you think a capital structure of 40% debt and the rest equity is more optimal. c. In 140 characters or less [TYPED]: why do you compute the cost of capital? 3. [18] Firms A {unlevered} & B sell Hot Dogs made from rattlesnake. Firm B’s capital structure is different – it has $ 10 million; 5% coupon bonds. EBIT for the firms is $ 2 million. Cost of equity for A is 10%. a. In a M&M world – estimate the value for A & B. b. Compute what the shareholders require as a return for A & B. 4. [8] Use numbers and show me how a stock split affects the balance sheet of a firm. 5. [10] Your firm has 25 million shares outstanding and they trade at $ 30. Net Income this year will be $ 3 million. You have $ 15 million to use and you plan to buy-back shares. a. What is the EPS before and after the repurchase? b. How many shares trade in the market after the buy back? 6. [18] MBA Inc. Market Value of Assets $ 10 million Face value of pure discount bond $ 4 million Debt Maturity 3 years Asset return σ 60% Rf 5% Compute market value of debt and equity. Use Table 17.3. DO NOT INTERPOLATE!!! Show ALL work. 7. [10] DRAW a payoff diagram: You are an executive and the Board allots you an option to buy 1000 shares at $ 15. Shares trade at $ 10 now. 8. [8] How does a Dutch auction work? Not more than 4 short sentences. Why does Underpricing exist? ***
*1. [20] Here are returns: Stock-A Market Yr-1 14% 12% Yr-2 19 10 Yr-3 -16 -12 Yr-4 3 1 Yr-5 20 15 a. Compute the beta for A. b. Compute the required rate of return for A. c. Suppose stock A”s return is 23%, is the stock fairly valued? 2. [14] Six-Sixty-One Inc. has an optimal capital structure as follows: Debt $ 45 million Common Equity $ 100 million You can sell 30 year, $ 1000 face value, 6% coupon bonds at 90% of par value. The next dividend will be $ 1.50; and shares trade at $ 50. The firm’s growth rate is 10%. The tax rate is 30%. a. Compute the WACC. b. Compute the WACC if you think a capital structure of 40% debt and the rest equity is more optimal. c. In 140 characters or less [TYPED]: why do you compute the cost of capital? 3. [18] Firms A {unlevered} & B sell Hot Dogs made from rattlesnake. Firm B’s capital structure is different – it has $ 10 million; 5% coupon bonds. EBIT for the firms is $ 2 million. Cost of equity for A is 10%. a. In a M&M world – estimate the value for A & B. b. Compute what the shareholders require as a return for A & B. 4. [8] Use numbers and show me how a stock split affects the balance sheet of a firm. 5. [10] Your firm has 25 million shares outstanding and they trade at $ 30. Net Income this year will be $ 3 million. You have $ 15 million to use and you plan to buy-back shares. a. What is the EPS before and after the repurchase? b. How many shares trade in the market after the buy back? 6. [18] MBA Inc. Market Value of Assets $ 10 million Face value of pure discount bond $ 4 million Debt Maturity 3 years Asset return σ 60% Rf 5% Compute market value of debt and equity. Use Table 17.3. DO NOT INTERPOLATE!!! Show ALL work. 7. [10] DRAW a payoff diagram: You are an executive and the Board allots you an option to buy 1000 shares at $ 15. Shares trade at $ 10 now. 8. [8] How does a Dutch auction work? Not more than 4 short sentences Why does Underpricing exist?