Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

1. Lockheed Corporation

Lockheed Corporation (prior to its merger) reported EBITDA of $1290 million in 1993, prior to interest expenses of $215 million and depreciation charges of $400 million. Capital expenditures in 1993 amounted to $450 million, and working capital was 7% of revenues (which were $13,500). The firm had debt outstanding of $3.068 billion (book value), trading at a market value of $3.2 billion, and yielding a pre-tax interest rate of 8%. There were 62 million shares outstanding, trading at $64 per share, and the most recent beta is 1.10. The tax rate for the firm is 40%; the Treasury bond rate is 7% and the risk premium is 5.5%.

The firm expects revenue, earnings, capital expenditures and depreciation to grow at 9.5% per year from 1994 to 1998, after which the growth rate is expected to drop to 4%. (Capital spending will offset depreciation in the steady state period). The company also plans to lower its debt/equity ratio to 50% for the steady state (which will result in the pre-tax interest rate dropping to 7.5%).
Estimate the value of the firm (in year 1993).

2. Imperial Sandwich Plc

Imperial Sandwich Plc is to be established shortly. The founders are considering their options with regard to capital structure. A total of £5 m will be needed to establish the business and the two ways of raising these funds being considered here are:

a) Selling 1 million shares at £5.00

b) Selling 500,000 shares at £5.00 and borrowing £2.5 million with an interest rate of 10%.

The company plans to pay out the total net income as dividends to the shareholders. The possible outcome for the future EBIT is £750,000.

The corporate tax rate is 40%.

The founders has analyzed a proxy company and found it to have a beta of 1.2 and a market debt-equity ratio of 0.5. The risk-free rate is 5.8% and the market premium 4.5%

a) find out the WACC under each of the capital structures. Comment on the result.

b) Suppose that the founders of Imperial Sandwich Plc chose an equal debt-equity capital structure and established the company sometimes ago. The company generates a certain EBIT of 900,000 in perpetuity. But now the CFO of Imperial Sandwich has proposed that the company should sell equity and buy back debt in order to maximize its value. If 250,000 shares are issued at £ 5 each, £1.250 million is collected and used to retire £1.250 million of debt. Given your understanding of modern finance theory, discuss this proposal in term of its effects on firm value, price/earnings ratio and price per share. The corporate tax rate is 40% as above and the interest rate is 10% as above.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91535
  • Price:- $30

Guranteed 24 Hours Delivery, In Price:- $30

Have any Question? 


Related Questions in Basic Finance

Financial worksheetdo we have everything we need on sales

Financial Worksheet "Do we have everything we need on sales and costs?" you ask. "It must be time to compute the net present value (NPV) and internal rate of return (IRR) of the Apix expansion project." "We have the data ...

1an investor believes that a certain property is worth

1. An investor believes that a certain property is worth $10,000,000. The seller refuses to sell it for that amount, but has offered to provide a 5-year interest-only loan for $5,000,000 at 4% interest (annual payments a ...

The text web site has links to several sites with

The text Web site has links to several sites with information about stored-value cards. Some are maintained by card issuers, others by government agencies or consumer advocates. After visiting some of these sites, discus ...

Question 1finance has its origins ina economics and

Question 1 Finance has its origins in: a. economics and statistics b. accounting and sociology c. accounting and economics d. psychology and mathematics Question 2 Successful businesses typically progress through a serie ...

Consider the ar3 modeland suppose that the observed data

Consider the AR(3) model and suppose that the observed data are where {e t } and {a t } are independent and the initial values of x j  with j ≤ 0 are independent of et and at for t > 0. (a) Convert the model into a state ...

Will changes in technology affect the rate at which the

Will changes in technology affect the rate at which the short-run aggregate supply curve shifts in response to an output gap? Why or why not? Provide some specific examples of how technology will change the rate of adjus ...

If you were in senior leadership and presenting strategic

If you were in senior leadership and presenting strategic options for growth, which strategy would you recommend? 1) Maintain the current portfolio as is but initiate more profit requirements from all units. 2) Acquire a ...

What is a financial conglomeratediscuss the factors that

What is a financial conglomerate? Discuss the factors that contribute to the formation of fi nancial conglomerates.

The domestic and international financial marketplace topic

The domestic and international financial marketplace. Topic include financial markets, types of financial intermediaries, the form and methods of stock market operation, the stock market, multinational corporation, forei ...

Assignmentpublic budget cycledevelop a four- to five-page

Assignment Public Budget Cycle Develop a four- to five-page paper in which you analyze the Public Budget Cycle in a government agency of your choice. Be sure to include each of the phases of the budget cycle (preparation ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate