Problem 1: Consider the following tax rates for 2008:
Ordinary Income Rate: 35%
Capital Gains Rate: 15%
Dividend Rate: 15%
The effective dividend tax rate for a one-year individual investor in 2008 is closest to:
[Hint: T*d = [(Td - Tg) / (1 - Tg)]
Problem 2: Consider the following tax rates for 2008:
Ordinary Income Rate: 35%
Capital Gains Rate: 15%
Dividend Rate: 15%
The effective dividend tax rate for a buy and hold individual investor in 2008 is closest to:
[Hint: T*d = [(Td - Tg) / (1 - Tg)]
Problem 3: Consider the following tax rates for 2008:
Ordinary Income Rate: 35%
Capital Gains Rate: 15%
Dividend Rate: 15%
The effective dividend tax rate for a pension fund in 2008 is closest to:
[Hint: T*d = [(Td - Tg) / (1 - Tg)]
Problem 4: BEA Enterprise has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. BEA's unlevered cost of capital is 10% and there are 10 million shares outstanding. BEA's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. BEA's enterprise value is closest to:
[Hint: Enterprise Value = PV(Future FCF)]
- $400 million
- $450 million
- $500 million
- $900 million
Problem 5: BEA Enterprise has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. BEA's unlevered cost of capital is 10% and there are 10 million shares outstanding. BEA's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. BEA's total market value, including its cash is closest to:
[Hint: Enterprise Value = PV(Future FCF)]
- $400 million
- $450 million
- $500 million
- $900 million
Problem 6: BEA Enterprise in ready to launch a new product. Depending upon the success of this product, BEA will have a value of either $100 million, $150 million, or $191 million, with each outcome being equally likely. The cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable) so that the project has a beta of 0 and a cost of capital equal to the risk-free rate, which is currently 5%. Assume that the capital markets are perfect. The initial value of BEA's equity without leverage is closest to:
[Hint: Solve for Equity (unlevered) = Vu]
- $133 million
- $140 million
- $147 million
- $150 million
Problem 7: BEA Enterprise in ready to launch a new product. Depending upon the success of this product, BEA will have a value of either $100 million, $150 million, or $191 million, with each outcome being equally likely. The cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable) so that the project has a beta of 0 and a cost of capital equal to the risk-free rate, which is currently 5%. Assume that the capital markets are perfect. Suppose that BEA has zero-coupon debt with a $125 million face value due next year. The initial value of BEA's debt is closest to:
[Hint: Solve for Vdebt]
- $116 million
- $111 million
- $100 million
- $125 million
Problem 8: BEA Enterprise in ready to launch a new product. Depending upon the success of this product, BEA will have a value of either $100 million, $150 million, or $191 million, with each outcome being equally likely. The cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable) so that the project has a beta of 0 and a cost of capital equal to the risk-free rate, which is currently 5%. Assume that the capital markets are perfect. Suppose that BEA has zero-coupon debt with a $125 million face value due next year. The initial value of BEA's equity is closest to:
[Hint: Solve for VL]
- $15 million
- $24 million
- $29 million
- $30 million