Please answer all of the following problems:
Hannibal Corp. has a cost of equity of 11%, and an after tax cost of debt of 6%. Using market values, Hannibal's debt is 30% of the value of the firm and its equity is 70% of the value of the firm. What is the weighted average cost of capital?
Dexter Corp. can borrow at 7% and is has a 39% marginal tax rate. What is the after tax cost of debt?
Columbia Corporation has a beta of 1.8, the risk free rate is expected to be 4.5% and the market risk premium is expected to be 5%. Using the Capital Asset Pricing Model, what is the after tax cost of equity?
Quincy Corp. expects NOPLAT of $2,800,000 in the first year after the forecast period (or the first year of continuing value period. In addition Bo expects growth of 2% during the continuing value period, return on new invested capital of 10%, and a weighted average cost of capital of 8%. Using the formula on page 214 of the text, please calculate the continuing value.
St Louis Corp. expects free cash flows of $2,000,000, $1,200,000, $1,400,000, $1,800,000, $1,500,000, in years 1,2 3,4, 5 respectively. In addition, Go has a continuing value of $2,000,000 at the end of year 5 and a cost of capital of 8%. Assuming year end cash flows, please bring these cash flows to present discounting at the weighted average cost of capital and place the answer below as the enterprise value.
Perryville Corp. has an enterprise value of $5,000,000, long term debt of $800,000, and an under-funded pension obligation of $600,000. If Lo has 180,000 shares outstanding (and no shares under option), please compute the intrinsic value per common share.
Assume the same information as the prior problem. In addition, Perryville Corp. has 60,000 shares under option and "in the money". Please use the denominator method or exercise value approach on pages 289-290 in the book, and assume that all 60,000 option will be exercise (with no proceeds - because future grant will offset the proceeds). In addition, Perryville issued an additional 10,000 shares and the $1,000,000 in cash from the sale is added to the $5,000,000 enterprise value for a new enterprise value of $6,000,000. What is the new intrinsic value per common share?
For each of the following, what should happen to the equity value of a company if the following takes place? (hold all other variables constant):
The competitive advantage period increases for 5 years to 8 years - the equity value would increase / decrease (underline one)
General market rates of interest increase due to greater risk aversion - the equity value would increase / decrease (underline one)
The company moves to a production method that requires more working capital -- the equity value would increase / decrease
The company awards an increasing level of stock options to executives (without a commensurate increase in share price) -- the equity value would increase / decrease
The company moves to a delivery system that requires additional investment in plant property and equipment -- the equity value would increase / decrease
The company matures to a safer company and a lower cost of capital -- the equity value would increase / decrease
The company product and industry is expected to enjoy above normal growth rates due to a shift in consumer tastes and preferences -- the equity value would increase / decrease