1. A firm has four divisions: the beta for the laundry services division is 0.4, the beta for the custom irrigation division is 0.9, the beta for the clown rental division is 1.3, and the beta for the handheld thermonuclear division is 2.3. Each division is roughly the same size. What is the company’s overall beta? If the company is considering a new aquaculture project, what should the equity opportunity cost be? Assume the risk-free rate is 4% and the market return is expected to be 13%.
2. A firm with $162 per share price and 200k shares outstanding does a 4 for 3 stock split. What will the new price per share be following the stock split?
3. An all equity company has a book value equal to its market value, with $43k in cash and $67k in other assets. The firm has 7.5k shares outstanding and net income of $2k. If the firm uses its cash to complete a stock repurchase, what with the new EPS be? If the firm used its cash to pay a $5.73 dividend, what would the new stock price be?
4. You have the following data for Year 1. Find the Free Cash Flow for Year 1 (FCF1)
Year 1 Year 0
Depreciation 12.0 12.0
Interest expense 4.5 5.5
Gross Fixed Assets 16.5 13.0
Net Working Capital 7.5 8.3
Profit after Tax 15.0 14.5
5. Your company is evaluating a purchase of Skeksis Crystal Mining LLC. Skekis produced free cash flow of $7.3m last year, and this is expected to grow at 11% for the next five years before leveling off to a long term growth rate of 2%. Your company has a cost of capital of 10%, while Skeksis has a cost of capital of 13%. Skeksis has 3 million shares outstanding and $25m in debt. What would be the highest price you would pay per share of Skeksis’ stock?
6. Charge-On Electrical Services is considering a project that will save the company $3.5m at the end of the first year, with the cost savings growing at 3% per year indefinitely. The firm has a D/E ratio of .55. The firm’s beta is 1.2, with a risk free rate of 2% and a market risk premium of 8%. The firm’s bonds have 25 years remaining, pay a 5% semiannual coupon, and trade at 106% of par value, which is $1,000. The corporate tax rate is 40%. How much is the project worth to the company?