Corporate Finance Test Inquiries Essay

Final Exam Practice Problems

1 ) Firm ABC's only outstanding debt can be $100, 500 worth of coupon bond (market value). Its produce to maturity is 8%. Given that the tax rate is forty percent, what is their effective expense of debt? Effective cost of debts = expense of debt 2. (1-tax rate) =8%*(1-40%)=4. 8% 2 . Organization ABC contains a stock presently traded for $20. Another year's dividend will be $0. 20. The dividend progress rate is usually forecasted to be 6% forever. Risk-free rate is 3%, and marketplace risk high quality is 4%. Assume that Continuous Dividend Development Model and CAPM supply you with the same estimation of the cost of capital intended for equity, precisely what is the beta of their stock? By the Constant Dividend Growth Style:

Cost of Value = D/P+g = 0. 2/20+6%=7%

Simply by CAPM, cost of equity = R(f)+ beta * marketplace risk superior = 3% + beta* 4%, Set this to get equal to seven percent, solve for beta: beta=1

3. Firm ABC contains a cost of equity of 8%, a cost of debt of 5%. It stock is definitely traded in $10/share, and has twelve million stocks and shares outstanding. It is debt value is 20 dollars million. Tax rate is definitely 40%. What is its after-tax WACC?

Fairness Value sama dengan 10*10=$100 million, Debt Value=$20 million

So , equity pounds = 100/120=83. 3%, debts weight=20/120=16. 7%

After-tax WACC= equity pounds * expense of equity + debt fat * effective cost of debts =83. 3%*8%+16. 7%*5%*(1-40%) sama dengan 7. 2%

4. Imagine you will be the founder of any private organization ABC. In the beginning you brought up $500, 500 from a great angel entrepreneur from the first-round financing. Therefore, both both you and the angel investor hold 100, 1000 shares. Now in the second-found financing, you plan to raise one other $1, 500, 000 from a endeavor capitalist. The venture capitalist will hold likewise 100, 000 shares. What is the ownership before and after the second-round financing? Prior to the second-round auto financing, ownership sama dengan 100, 000/200, 000=50% After the second-round funding, ownership sama dengan 100, 000/300, 000=33%

a few. What is the difference between a " organization commitment IPO” and a great " public sale IPO”?

Consider the publication for the response.

6. Within an auction GOING PUBLIC, your firm wants to sell 200, 1000 shares. Here i will discuss the demand via potential traders at diverse price levels: Value Demand

$80 40, 1000

$75 forty five, 000

seventy dollars 70, 000

$65 50, 000

$60 60, 1000

At what amount should your organization set the IPO selling price?

Price should be $65. As of this price, the cumulative demand = 40, 000+40, 000+70, 000+50, 000=200, 000

7. Firm HURUF plans to issue 3 types of your five-year discount bond with coupon rate of 10%, and a face worth of $1000. Bond A is a callable bond, which in turn callable at par. Connect B is known as a plain-vanilla connect without any contact or descapotable feature. Connect C can be described as convertible connection with a transformation ratio of 10. In the event all three a genuine are the same except the phone call and convertibility feature, is it possible to make an inference regarding the rates of these 3 bonds?

The rest being equivalent, call bond price < plain-vanilla connect price < convertible connection price. It is because the callable bond supply the issuer the right to buy back the bond at the call price when the condition is favorable to the issuer, the convertible bond give the investor the right to convert the bond to stocks with the conversion proportion when the scenario is beneficial for towards the investor. Obviously investors ought to be willing to pay significantly less for callable bonds, but more intended for convertible a genuine.

8. IBM has just given a callable (at par) five-year, 8% coupon relationship with twelve-monthly coupon repayments. The relationship can be called by par in one year or perhaps anytime thereafter on a voucher payment day. It has a value of $103 per hundred buck face worth, implying a yield to maturity of 7. 26%. What is the bond's yield to call? What is the yield to worst?

Please consider the address slides in Lecture almost 8 for the solution.

9. Presume perfect capital markets and no taxes. The unlevered (all-equity) firm DASAR has a firm value of $100 mil, and expense of equity of 8%. If the firm determines to get debt, in order that the new financial debt to collateral ratio can be 1 to...


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