Assignment
ANSWER THE FOLLOWING QUESTIONS
1. Here is a book balance sheet for Duane S. Burg Associates. Figures are in millions.
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Assets
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Liabilities and Shareholders' Equity
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Assets (book value)
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$75
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Debt
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$25
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Equity
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50
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$ 75
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$75
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Unfortunately, the company has fallen on hard times. The 6 million shares are trading for only $4 apiece, and the market value of its debt securities is 20 percent below the face (book) value. Because of the company's large cumulative losses, it will pay no taxes on future income. Suppose shareholders now demand a 20 percent expected rate of return. The bonds are now yielding 14 percent. What is the weighted-average cost of capital?
2. Calculate WACC for Burg Associates (Data given in Question no. 1) company face a 35 percent corporate income tax rate.
3. What is the basic difference between sensitivity analysis and scenario analysis?
4. Consider a firm operating a copper mine that incurs both variable and fixed costs ofproduction. Suppose the mine can be shut down temporarily if copper prices fall belowthe variable cost of mining copper. Why is thisa valuable operating option? How doesit increase the NPV of the mine to the operator?