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MM assumed that firms do not grow. How does positive growth change their conclusions about the value of the levered firm and its cost of capital?
Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5 percent bonds outstanding.
Find VL and rsL if Schwarzentraub uses $5 million in debt with a cost of 7 percent. Use the extension= to the MM model that allows for growth.
How would the equity value and the yield on the debt change if Fethe’s managers were able to use risk management techniques to reduce its volatility.
Its current cost of equity, rs, is 14 percent. If it increases leverage, rs will be 16 percent. If it decreases leverage, rs will be 13 percent.
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8 percent.
A change in the Tax Code so that both realized and unrealized capital gains in any year were taxed at the same rate as dividends.
If your company has established a clientele of investors who prefer large dividends, the company is unlikely to adopt a residual dividend policy.
Operating leverage; financial leverage, breakeven point. Capital structure; business risk; financial risk.
What is the project’s expected NPV, its standard deviation, and its coefficient of variation?
What is the expected value of the annual net cash flows from each project? What is the coefficient of variation (CV)?
If Fethe makes the investment today, then it will have the option to renew the franchise fee for 2 more years at the end of Year 2 for an additional payment.
Investment timing option; growth option; abandonment option; flexibility option. Decision trees.
Assume that this project has average risk. Construct a decision tree and determine the project’s expected NPV.
Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit.
Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million.
The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns.
Hart Lumber is considering the purchase of a paper company. Purchasing the company would require an initial investment of $300 million.
Given that there is a 50 percent chance that the tax will be imposed, what is the project’s expected NPV if they proceed with it today?
Fethe’s Funny Hats is considering selling trademarked curly orange-haired wigs for University of Tennessee football games.
“One type of leverage affects both EBIT and EPS. The other type affects only EPS.” Explain this statement.
Should the firm accept the project? (Hint: The project is a perpetuity, so you must use the formula for a perpetuity to find its NPV.)
Investment timing option; growth option; abandonment option; flexibility option.
Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine.
Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?