Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Financial Management Expert

Answer the following problems clearly, completely, yet concisely.

1. Lockheed Martin’s management desires to find out whether they have excess debt capacity. Its present market value of equity is $40 b and its book value of debt is $ 4b. The company’s EBIT last year was about $4b. The present beta of the company’s stock is 0.5, marginal tax rate is 30%. Suppose that prtesent five-year Treasuries yield 2.0% and ten-year Treasuries yields 3.0%. For cost of equity calculation, suppose that risk-free rate is 3% and market risk-premium is 4%. Using the table below as broad guidelines, will the firm minimize WACC at no debt, present level of debt, 25% debt, or 50% debt? Describe all your steps in the calculation. Suppose that the firm size will remain the same under all scenarios (Debt issued will be used to repurchase shares).

                                         AAA       AA      A      BBB     BB     B         CCC
EBIT interest coverage (x)  23.8        19.5   8.0     4.7     2.5    1.2       0.4
Five year yield spreads       50            57     60      120    280    525      900
Ten year yield spreads       64            72      87     160     350   600      1320

2. a. You are engineering a Leveraged-Buy-Out (LBO) of ACME Industries, an industrial bottle maker. After the LBO, the firm would be financed with 90% debt and 10% equity. Fred Farber, the CEO, will own 30% of the shares. Fred thinks that the proposed capital structure is too highly levered and points out that, in the first few years, the firm will not be able to use all its debt tax shields. Initially, the interest payments are $400m per year and EBIT is only $300m per year. However, EBIT is projected to increase 20% per year for the next five years. Provide Fred a true tax argument that supports the high level of debt. Take into account his personal taxes as well as corporate taxes. Does your tax argument depend on whether Fred wants to dilute his ownership of the company in the future?

b. Debt is always cheaper than equity. How will you respond to this comment?

3. a. Provide at least 4 reasons why the firm might prefer to repurchase stock than to pay out dividends. What factors have influenced the strong growth in repurchase over last two decades?

b. Dividends are tangible. Unrecognized capital gain is paper money. Therefore Dividends are always preferable to no payouts by the firm. Discuss.

4. a. What are short-term and long-term market reactions after an IPO? What are the potential reasons for these returns?

b. How do you describe the lack of IPO activity in the United States in recent years?

5. Consider a recent merger between two major corporations. describe the terms of the merger (cash or stock, premium, changes in management / directors, etc.). describe the motivations behind these terms and whether you feel that these are appropriate.

6. Using exs from news reports within the last one year about public companies, describe how the concepts of adverse selection and moral hazard. describe the problems created in these situations and the extent of the problems that this has created for the firms. How have these firms attempted to reduce these problems?

7. Consider an intermediary (preferably the firm you work for). describe how your firm creates value for its clients based on taxes, transactions costs, information asymmetry, regulations, and efficient markets.

8. In May 2003, Gencorp acquired Sequa Corp.’s propulsion subsidiary ARC for $133million in cash and $11 million in transactions costs. Table below lists selected information about ARC at the time of acquisition (‘000s):
Sales $ 300,000
Operating income (loss) $ 8,000
Total assets $ 250,000
Capital expenditures $ 20,000
Depreciation and amortization $ 25,000
Intangible Assets (process technology) $ 20,000
Over the next three years,

a. ARC sales will increase by 5% each year (with or without the merger). Part of the reason for the merger is Gencorp’s expectation that ARC would achieve this growth at the expense of Gencorp’s propulsion division (with or without the merger).

b. Operating income will remain as the same fraction of sales.

c. Capital spending needs to be maintained at current levels and depreciation will remain constant. But, the acquisition lowers Gencorp’s capital spending, without any further loss in sales, by $5,000 a year, for the next three years. Assume that the lowered capital expenditures will have no impact on depreciation. After three years,

d. free cash flows to the firm (ARC) are expected to grow at a constant rate of 3% forever, with or without the merger. No impact on Gencorp after year 3.
The average beta for the industry is 1.5, with a market value based debt ratio of 50%. As part of the combined firm the debt ratio can be increased to 60% without any change in the pre-tax cost of debt of 7.5%. Market risk premium is 4% and risk- free rate is 5%. Marginal tax rate is 30%. Is the acquisition beneficial for Gencorp’s shareholders?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M91297

Have any Question? 


Related Questions in Financial Management

Suppose that ken-z art gallery has annual sales of 892000

Suppose that Ken-Z Art Gallery has annual sales of $892,000, cost of goods sold of $582,000, average inventories of $168,000, average accounts receivable of $137,000, and an average accounts payable balance of $65,000. A ...

A stock is trading at 60 per share the stock is expected to

A stock is trading at $60 per share. The stock is expected to have a year-end dividend of $3 per share (D1 = $3), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is ...

In describing the work of hedge funds financial journalist

In describing the work of hedge funds, financial journalist Sebastian Mallaby has observed: [Research] showed that the unglamorous "value" stocks were underpriced relative to overhyped "growth" stocks. This meant that ca ...

1 when a loan is amortized a relatively low percentage of

1. When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years. True Fals ...

Analyze the firmrsquos financial condition in 2015 as it

Analyze the firm’s financial condition in 2015 as it relates to (1) liquidity, (2) activity, (3) debt, (4) profitability, and (5) market, using the financial statements provided in Tables 2 and 3 and the ratio data inclu ...

Per a financial analystrsquos projection dprsquos stock

Per a financial analyst’s projection, DP’s stock will be worth $60 per share in three years. The company just paid a dividend of $1.50 per share and expects an annual increase of $0.50 in dividend per share during the ne ...

Of the following options which would you expect to have the

Of the following options, which would you expect to have the highest option price? a. A European 3-month put option on a stock whose market price is $90 where the strike price is $100. The standard deviation of the stock ...

You buy a zero coupon bond at the beginning of the year

You buy a zero coupon bond at the beginning of the year that has a face value of $1,000, a YTM of 11 percent, and 23 years to maturity. You hold the bond for the entire year. Assume semiannual compounding. How much inter ...

One of the following statements about the dupont model is

One of the following statements about the DuPont model is incorrect: A. It shows how ROE is a combination of Leverage and RRI B. It may use BEP in place of RRI if NIAT is not available C. Can be used to assess the source ...

Youve been analyzing a 10 million capital investment with a

You've been analyzing a $10 million capital investment with a 5-year useful life, but it has a negative NPV of $500,000. However, the SVP of Operations just phoned with good news: The initial investment in the capital as ...

  • 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