Muggle Company Essay
1. The Muggle Co. has just paid a dividend of $1 per share. The dividends are expected to grow at 20% per year for the next three years and at the rate of 5% per year thereafter. If the required rate of return on the stock is 15%(APR), what is the current value of the stock?
2. Here are the possible projects for a firm: A B C D E F G 5 4 5 1 2 7 8 Initial investment 1.5 –0.5 1 0.5 0.5 1 1 NPV The firm has only twenty million to invest. What is the maximum NPV that the company can obtain?
3. Stock A has an expected return of 20% and Stock B has an expected return of 12%. The risk of stock A as measured by the variance is three times that of stock B. If the correlation coefficient between …show more content…
The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. a. Calculate the expected return for Stock B and the market portfolio. b. Calculate the variance in the market. c. Calculate the covariance of returns between Stock B and the market portfolio. d. Calculate the beta for Stock B. e. If the risk-free rate is 4%, calculate the market risk premium. f. Calculate the required rate of return (cost of equity) for Stock B using CAPM.
5. If a firm borrows $25 million for one year at an interest rate of 10%, what is the present value of the interest tax shield? Assume a 35% tax rate.
6. The Basilisk Company has total assets of $30 million, of which $10 million are financed by debt and $20 million by equity. The EBIT (earnings before interest and tax) is $6 million. If the firm's tax rate is 34%, and the interest rate on debt is 10%, calculate its after-tax cash flow.
7.Suppose that a company can direct $1 to either debt interest or capital gains for equity investors. The corporate tax rate is 35%. What is the marginal personal income tax rate at which investors do not care how the money was …show more content…
if there are no personal taxes on capital gains? b. if half of equity income were subject to personal tax?
8. Suppose that the expected return on a safe, zero-NPV, all-equity financed project is 10%. Assuming a 35% corporate tax rate, what should be the interest rate on risk-free debt?
9. The Gimli Paving Co. wishes to have debt-to-equity ratio of 1.5. Currently it is an unlevered (all equity) firm with a beta of 1.1. What will be the beta of the firm if it goes through the capital restructuring process and attains the target debt-to-equity ratio? Assume a tax rate of 30%.
10. A project will generate a forecasted interest tax shield of $150,000 per year in perpetuity. If the firm's borrowing rate is 7% and the opportunity cost of capital is 16%, what is the present value of the tax shield? Assume debt is rebalanced each year (rule 2).
11. A stock is currently selling for $100. One year from today the stock price could go up by 30% or go down by 20%. The risk-free interest rate is 10%[APR]. Calculate the price of a one-year European call option on the stock with an exercise price of $100 using the binomial
2. Here are the possible projects for a firm: A B C D E F G 5 4 5 1 2 7 8 Initial investment 1.5 –0.5 1 0.5 0.5 1 1 NPV The firm has only twenty million to invest. What is the maximum NPV that the company can obtain?
3. Stock A has an expected return of 20% and Stock B has an expected return of 12%. The risk of stock A as measured by the variance is three times that of stock B. If the correlation coefficient between …show more content…
The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. a. Calculate the expected return for Stock B and the market portfolio. b. Calculate the variance in the market. c. Calculate the covariance of returns between Stock B and the market portfolio. d. Calculate the beta for Stock B. e. If the risk-free rate is 4%, calculate the market risk premium. f. Calculate the required rate of return (cost of equity) for Stock B using CAPM.
5. If a firm borrows $25 million for one year at an interest rate of 10%, what is the present value of the interest tax shield? Assume a 35% tax rate.
6. The Basilisk Company has total assets of $30 million, of which $10 million are financed by debt and $20 million by equity. The EBIT (earnings before interest and tax) is $6 million. If the firm's tax rate is 34%, and the interest rate on debt is 10%, calculate its after-tax cash flow.
7.Suppose that a company can direct $1 to either debt interest or capital gains for equity investors. The corporate tax rate is 35%. What is the marginal personal income tax rate at which investors do not care how the money was …show more content…
if there are no personal taxes on capital gains? b. if half of equity income were subject to personal tax?
8. Suppose that the expected return on a safe, zero-NPV, all-equity financed project is 10%. Assuming a 35% corporate tax rate, what should be the interest rate on risk-free debt?
9. The Gimli Paving Co. wishes to have debt-to-equity ratio of 1.5. Currently it is an unlevered (all equity) firm with a beta of 1.1. What will be the beta of the firm if it goes through the capital restructuring process and attains the target debt-to-equity ratio? Assume a tax rate of 30%.
10. A project will generate a forecasted interest tax shield of $150,000 per year in perpetuity. If the firm's borrowing rate is 7% and the opportunity cost of capital is 16%, what is the present value of the tax shield? Assume debt is rebalanced each year (rule 2).
11. A stock is currently selling for $100. One year from today the stock price could go up by 30% or go down by 20%. The risk-free interest rate is 10%[APR]. Calculate the price of a one-year European call option on the stock with an exercise price of $100 using the binomial