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

Nme at least three ways to reduce the possibility of scc

Name at least three ways to reduce the possibility of SCC? Which is better, a relatively small anode or a large one and why? Is coating a fastener always helpful in fighting corrosion resistance, even if there are minor ...

If there are costs associated with financial distress how

If there are costs associated with financial distress, how may this affect the capital structure decision of a company? Why do we adjust for taxes in determining the cost of debt, but not for the costs of preferred stock ...

If the net cash flows from operating investing and

if the net cash flows from operating, investing, and financial activities sum to zero, what is the change in cash compared to last period?

If the risk-free rate is 103 percent and the market risk

If the risk-free rate is 10.3 percent and the market risk premium is 4.6 percent, what is the required return for the market?

For each of the following situations determine whether a

For each of the following situations, determine whether a long or short hedge is appropriate. Justify your answers. a. A firm anticipates issuing stock in three months. b. An investor plans to buy a bond in 30 days. c. A ...

1 compare and contrast economic market and relevancy value2

1. Compare and contrast economic, market, and relevancy value. 2. Illustrate the differences in product/service creation, presentation, and positioning. 3. Explain the folIowing statement: "The methodology is systems ana ...

1 describe the services and characteristics that are of

1. Describe the services and characteristics that are of prime importance to you in a financial institution. 2. Which of the financial institutions you evaluated is most optimal for your needs? Why? 3. Advise the Sampson ...

Accountingthe analysis of changes in cash for a

Accounting The analysis of changes in cash for a consolidated entity begins with the consolidated balance sheets. There are several issues that you should keep in mind when preparing a consolidated statement of cash flow ...

1 should demand characteristics be eliminated or

1. Should demand characteristics be eliminated or strengthened in an experiment? Explain. 2. How do researchers detect and eliminate placebo effects? 3. What effect does error variance have on the results of an experimen ...

1 why is it possible to consider anova as a special case of

1. Why is it possible to consider ANOVA as a special case of regression? 2. Give an example of when simultaneous, hierarchical, and stepwise multiple regression analyses might be used in research. 3. How is a log linear ...

  • 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

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen