Advanced Finance - 1219 Words

Assignment 1 1. Financing choice in perfect markets (assume no taxes) ABC is a small company with the following assets: * Existing assets with current book value of $6 mm. These assets will generate cash flows of either $8 mm or $8.8 mm next year, depending on whether the economy is in a recession or a boom. * A new project idea which requires an investment of $2 mm and will generate total cash flows (including any salvage or terminal value) next year of either $4mm (recession) or $8mm (boom). The firm has not yet raised the cash to make this investment, but the market is aware of the investment opportunity. ABC will cease to exist after the cash flows are realized and distributed to investors. Both states of the economy†¦show more content†¦5*100%/20=25% b) If Olin issues $40 mm in debt to repurchase 2 million shares of equity (i.e. they replace $40 mm of equity with $40 mm of debt in their capital structure), and the interest rate on the debt is 10%, what will be the expected EPS next year? (5*10-40*10%)/(10-2)=$5.75 c) What will be the required return on equity (rE) after the change in capital structure from part b? 5.75*8/(200-40)=28.75% d) Calculate the new value per share after the capital structure change. (Hint: use your answers to parts b and c.) 5.75/28.75%=20 e) Calculate the WACC after the capital structure change 28.75%*0.8+10%*0.2=25% 3. Equity Issuance and Dilution Acme Mfg currently is all-equity financed, with 2 mm shares outstanding at a current price of $40/sh. The firm announces they will raise $8 mm by issuing new equity to fund a new project (assume investors expect the NPV of the new project is 0). a) How many shares will the firm have to issue, assuming they issue the new shares at the current price per share? 8/40=0.2 mm shares b) What will be the total equity value and equity price per share after the issuance is completed? Total equity value: 8+40*2=88 Equity price per share: 88/2.2=$40/share c) Is shareholder value diluted by the issuance? Why or why not? No. Because the project has an NPV of 0. It will not dilute the value of shareholder equity. 4. Swedish Match Case Read the â€Å"NewShow MoreRelatedAdvanced Corporate Finance4303 Words   |  18 PagesUniversity of Puget Sound School of Business and Leadership BUS 434 Advanced Corporate Finance Professor Alva Wright Butcher Tues-Thurs 11:00-12:20 McIntyre 107 Spring Semester 2012 Office: McIntyre 111 I Phone: 253-879-3349 FAX: 253-879-3156 Office Hours: T-Th: 1:00-1:50 Wed: 9:30-10:30 And by appointment Note that I am always willing to schedule additional office hours by appointment. I check email frequently, so that is also a goodRead MoreAdvanced Managerial Finance2203 Words   |  9 Pages $1,760,000,000 = 2.86 Reasons of different capital structure Capital structure means the method that an organization used to finance their assets. It is included debt capital and equity capital. Capital structure will only benefit shareholders when the value of the firm increases. 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