Solution Library


Assessment Of Return On Equity For A Firm

QuestionGeKay Inc is levered with debt/value of 0.4. Analysts are forecasting GeKay’s EPS for next year at $2 and a return on equity (ROE) of 18%.  Butler Inc is a firm in the same industry and has the same operating earnings as GeKay but Butler is all-equity financed with a beta of 0.75. ... Read More

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Using M&M Model Calculate Value Of Firm

QuestionThompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm under M&M if you ignore taxes?  A.&nb ... Read More

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Factors Considered For Target Debt To Equity Ratio

QuestionWhat three factors are important to consider in determining a target debt to equity ratio? A. Taxes, asset types, and pecking order and financial slackB. Asset types, uncertainty of operating income, and pecking order and financial slackC. Taxes, financial slack and pecking or ... Read More

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Calculation Of Profit Or Loss By Investing In Call Option

QuestionYou wrote ten Call Option contracts on JIG stock with a strike price of $40 and an option price of $.40.What is your net gain or loss on this investment if the price of JIG is $46.05 on the option expiration date? A. -$6,450B. -$5,650C. $400D. $5,650E. $6,450F. None ... Read More

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Conditions For Repurchase Of Stock

QuestionIf you ignore taxes and transaction costs, a stock repurchase will?I. reduce the total assets of a firm.II. increase the earnings per share.III. reduce the PE ratio more than an equivalent stock dividend.IV. reduce the total equity of a firm. A. I and III onlyB. II and IV onlyC.&nb ... Read More

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Calculate Stock Price Per Share With Market And Book Value Being Equal

QuestionA firm has a market value equal to its book value. Currently, the firm has excess cash of $500 and other assets of $9,500. Equity is worth $10,000. The firm has 250 shares of stock outstanding and net income of $1,400. What will the stock price per share be if the firm pays out its excess ca ... Read More

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Calculation Of Debt To Equity Value With Assets Market Value Given

QuestionA firm’s assets have a market value of $500m; the asset returns have a standard deviation of 25% per year. The firm is financed with zero coupon debt having a face value of $400m and maturing in 5 years. The (continuously compounded) risk free rate is 5%. What is the value of the debt ... Read More

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Calculation Of Debt To Equity Value When Internally Financed

QuestionA firm’s assets have a market value of $500m; the asset returns have a standard deviation of 25% per year. The firm is financed with zero coupon debt having a face value of $400m and maturing in 5 years. The (continuously compounded) risk free rate is 5%. Suppose the firm now has a pot ... Read More

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Calculation Of Net Present Value With Standard Discount Cash Flow Analysis

QuestionSuppose GeKay Inc. has a two-year lease over a small copper deposit; the government acquires all rights to the property at the end of the lease. It is known that the deposit contains eight million pounds of copper. Mining would involve a one-year development phase that would have an immediat ... Read More

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Calculate Economic Value Added With Debt Cost And EBIT Rates Given

QuestionWestbrook Inc. is financed with debt that costs it 5% (pre-tax) or $12.5m annually and expects to generate an EBIT of $50m per year perpetually. The company is at its target debt/equity ratio of 1.  Depreciation is expected to remain at $2.5m annually and taxes at the rate of 40% (for t ... Read More

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Stock Repurchase Financed By Debt And Decline Of Share Price

QuestionA firm announces its intent to undertake a levered recapitalization, issuing debt to repurchase a fraction of the outstanding common stock. Upon the announcement, its stock price declines. Describe (list) 2 reasons why you might have expected that the price would instead have risen and 2 rea ... Read More

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Calculate Stock Price With Debt To Value Ratio, Net Income, Dividend Payout Ratio Being Given

QuestionGeKay Inc. currently (January 1) has a net income of $10,000,000 which is expected to grow indefinitely (perpetuity) at 10% per annum. The firm is financed at a debt-to -value ratio of 30%. The firm has a 50% dividend payout to shareholders (dividends paid at year-end), with 10m shares of co ... Read More

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