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

1 what are some ways in which scientists get ideas for

1. What are some ways in which scientists get ideas for their research? 2. Why can theories not be proved or disproved by research? 3. Given that proof and disproof are impossible in science, how does scientific knowledg ...

1 when are correlational research designs used in

1. When are correlational research designs used in behavioral research? What are their advantages and disadvantages? 2. What are a linear relationship and a curvilinear relationship? What does it mean if two variables ar ...

Dealer quotes a rate of 5 on this fra and the end user

Dealer quotes a rate of 5% on this FRA and the end user agrees. The expiration date is in 90 days. The notional amount is $3,000,000. The underlying interest is the 180 LIBOR time deposit. In 90 days the 180-day LIBOR is ...

Newton is going to attempt to kill einstein by chopping him

Newton is going to attempt to kill Einstein by chopping him into pieces using the Newtonian Blades Death. The blades are separated by 1m and fall instantly and simultaneously. Einstein is 2m tall and flies from left to r ...

An engineer at a pulp plant is considering the feasibility

An engineer at a pulp plant is considering the feasibility of sparging a waste gas stream containing a small concentration of chlorine gas into a chlorine-bleaching unit in order to augment the chlorine requirements for ...

The spot rate for the danish krone is usd01500 and the

The spot rate for the Danish krone is USD0.1500 and the three-month forward rate is USD0.1505. Your company is prepared to speculate that the Danish krone will move to USD0.1650 by the end of three months. (a) Are the qu ...

You borrow 75000 for 30 years at 11 interest compounded

You borrow $75,000 for 30 years at 11% interest compounded annually. 1. The value of the property is $100,000, PGI= $20,000, vacancy rates are 8%, and operating expenses are $81,000. 2. Calculate the annual debt service. ...

Cost of common equity with flotationbanyan cos common stock

Cost of Common Equity with Flotation Banyan Co.'s common stock currently sells for $42.00 per share. The growth rate is a constant 11.2%, and the company has an expected dividend yield of 3%. The expected long-run divide ...

Option valuation projectquestion 1 calculate the normal

Option Valuation Project Question 1: Calculate the normal distribution and cumulative distribution for "d" ranging from -5 to +5 in increments of 0.2. Assume the distribution is standard normal (mean = 0, variance =1). U ...

In addition to the key words you should be able to define

In addition to the key words, you should be able to define each of the following terms: literature search subject words database abstract PsycINFO PsycArticles title introduction method section results section discussion ...

  • 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

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

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