Corporate Finance - Unit 7 Assignment

Unit 7 – Assignment

MT480 – Corporate Finance

Professor Daniel Weiss

CHAPTER 17

QUESTION 3

A

The market price of the stock is not affected by the announcement

B

Since the market price of the shares is $10, the company would be in a position to buy back $160 million/$10 = 16 million shares

C

After the change in capital structure, the market value of the company would be unchanged. Equity + Debt = (9 million $10) + $160 million = $250 million

D

After the change in structure, the debt ratio is Debt/(Debt + Equity) = $160 million/$250 million = 0.64

E

There are no winners or losers in this case.

QUESTION 13

A

E = $55 10 million = $550 million

V = D + E = $200 million + $550 million = $750 million

After-tax WACC =

B

The after-tax WACC would increase to the extent of the loss of the tax deductibility of the interest on debt. Therefore, the after-tax WACC would equal the opportunity cost of capital, computed from the WACC formula without the tax-deductibility of interest:

CHALLENGE QUESTION 2

There will be instances where the shopper may only want the chicken drumstick. They could purchase the whole chicken, portion it, and sell the other parts in another venue. This would be un-cost effective manner to do things, so the store would be much better off to sell the pieces separately themselves, even though there would be labor costs associated with doing so. Therefore the supermarket must charge more to sell the pieces individually.

This same example applies to the financial aspect of operations, but the proportionate costs to the firm of “repackaging” the cash flow streams would be small. In addition investors can also “repackage” their cash flows inexpensively for themselves.

CHAPTER 18

QUESTION 7

A

SOS stockholders are at risk of losing if they invest in the positive NPV project, and the outcome is that SOS becomes bankrupt. The benefits of the project...