QUESTION 1 The market value of Firm K’s debt is $500 000 and its yield is 9%. The firm’s equity has a market value of $400 000 its earnings are growing at a rate of 3% and its tax rate is 40%. A similar firm with no debt has a cost of equity of 10%. Under the MM extension with growth what would Firm K’s total value be if it had no debt? $642 600 $617 400 $630 000 $642 857 QUESTION 2 Penny Corp. is interested in acquiring Coaxial Inc. Coaxial has 1 million shares outstanding and a target capital structure consisting of 55% debt. Coaxial’s interest rate is 6.25%. Assume the risk free rate of interest is 5% and the market risk premium is 6%. Both companies have a 40% tax rate. Coaxial’s free cash flow is $3.5 million per year and is expected to grow at a constant rate of 3.5% a year. It’s beta is 1.8. What is the value of Coaxials Operations? $57 474 658 $60 667 695 $63 860 732 $67 053 768 QUESTION 3 A regional chain Janson Inc is considering purchasing a smaller chain Cobalt Ltd which is currently financed using 25% debt at a cost of 9.5%. Janson’s analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1 $4 million in Year 2 $5 million in Year 3 and $117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.) The acquisition would be made immediately if it is to be undertaken. Cobalt’s pre-merger beta is 1.7 and its post-merger tax rate would be 34%. The risk-free rate is 6.5% and the market risk premium is 4%. What is the appropriate rate for use in discounting the free cash flows and the interest tax savings? 11.1% 12.4% 13.0% 13.6% QUESTION 4 The owners of Givens Inc. are contemplating purchasing Wedge Inc a smaller chain. Givens’s analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $35.6 million and they have determined that the appropriate discount rate for valuing Wedge is 16%. Wedge has 2.5 million shares outstanding and no debt. Wedges’ current price is $16.25. What is the maximum price per share that Givens should offer? $12.10 $13.53 $14.24 $14.95 QUESTION 5 Suppose the June CBOT Treasury bond futures contract has a quoted price of 100’25. What is the implied annual interest rate inherent in the futures contract? 5.81% 5.58% 5.70% 5.93% QUESTION 6 Suppose the June CBOT Treasury bond futures contract has a quoted price of 80’07. If annual interest rates went down by 1.00 percentage point what is the gain or loss on the futures contract? (Assume a $1 000 par value and round to the nearest whole dollar.) ?$94.86 ?$91.17 ?$96.75
