Mgf301

ASSIGNMENT 5

MGF 301

Corporation Finance

Fall 2015

DUE: Wednesday, December 9th at 11:00am in Jacobs 365 (Wednesday, December 9th at 11:59pm Singapore time)

You may work in a group of up to 4 on this Assignment. Please indicate clearly on all submitted Assignments who the members of the group are. Please note, all assignments submitted with more than 4 group members will automatically receive a 0 grade.

No late assignments will be accepted. You may hand in the assignment in person in Jacobs 365 (put it under the door if no one is there) or submit it by email to the link in UBLearns before the time it is due. All electronic submissions must be to the link in UBLearns (Note: please follow all the Digital Submission rules (see Syllabus).

Answer all of the following questions. For each answer, show your work.

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1. The total book value of WTC’s equity is $60 million and book value per share outstanding is $10. The stock of WTC is currently selling for a price of $25 per share and the beta of WTC is 1.25. The bonds of WTC have a face value of $52 million and sell at a price of 130 percent of face value. The yield to maturity on the bonds is 5.5 percent and the firm’s tax rate is 35 percent. If the E(Rm) = 8% and Rf = 1%, calculate the WACC of WTC.

2. Suppose the company in #1 is considering the following expansion projects. How would you calculate the required rate of return to use in the NPV analysis of the following: Explain.

(a) The company is considering an expansion to double the production of its current product. The company will issue either equity or debt (but not both) to pay for the expansion.

(b) The company is considering adding a new product in a different line of business that is unrelated to their current product.

3. One year ago, an American investor bought 2000 shares of London Bridges at a...