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

What is the yield to maturity on a treasury strips with 7

What is the yield to maturity on a Treasury STRIPS with 7 years to maturity and a quoted price of 77.859? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" ...

Dorex inc presented the following comparative income

Dorex, Inc., presented the following comparative income statements for 2011, 2010, and 2009 Required a. Calculate the following for 2011, 2010, and 2009: 1. Net profit margin 2. Return on assets 3. Total asset turnover 4 ...

1 risk-free interest rate the interest that an investor

1. Risk-free interest rate The interest that an investor should expect from a short-term corporate bond. The interest that an investor should expect from an asset with no liquidity premium. The interest that an investor ...

Investment problem1 a credit union wants to make

Investment Problem 1) A credit union wants to make investments in the following: Type of Investment Annual Rate of Return (%) Vehicle loans 6 Consumer loans 12 Other secured loans 5 Signature loans 8 Risk-free securities ...

1 types of credit explain the three types of credit under

1. Types of Credit. Explain the three types of credit. Under what conditions might a consumer find each type useful? 2. Using Credit. What are the advantages and disadvantages of using credit? 3. Credit Rights. The Equal ...

Youre trying to save to buy a new 201000 ferrari you have

You're trying to save to buy a new $201,000 Ferrari. You have $51,000 today that can be invested at your bank. The bank pays 5.9 percent annual interest on its accounts. How long will it be before you have enough to buy ...

A property is leased for 24000 per year although market

A property is leased for $24,000 per year although market rents are currently $27,500 per year and are expected to increase by 2% per year. The property is expected to be sold at the end of year 10 based on a 10% termina ...

Financial management1what is the future value of 500 a year

Financial Management 1. What is the future value of $500 a year for nine years compounded annually at 11%? How much will the future value of $900 for nine years compounded annually at 11% be? 2. How many years will it ta ...

A 20-year annuity pays 1700 per month and payments are made

A 20-year annuity pays $1,700 per month, and payments are made at the end of each month. The interest rate is 6 percent compounded monthly for the first Five years and 4 percent compounded monthly thereafter. Required: W ...

In the united states during some years in the 1970s the

In the United States, during some years in the 1970s, the real rate of interest on many bonds was negative. a. How can the real rate of interest be negative? b. Why were lenders willing to accept a negative real rate of ...

  • 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