Question 1. (15 points) Kern Corporation entered into an agreement with its investment banker to
sell 10 million shares of the company\u2019s stock with Kern netting $210 million dollars from the
offering. The expected price to the public was $25 per share.
The out-of-pocket expenses incurred by the investment banker were $2,000,000.
a. What profit or loss would the investment banker incur if the issue were sold to the public at an
average price of $25 per share?<\/p>\n
b. What profit or loss would the investment banker incur if the issue were sold to the public at
an average price of $20 per share?<\/p>\n
c. Is the agreement between the company and its investment banker an example of a
negotiated or a best-efforts deal? Why? Which is riskier to the company? Why?<\/p>\n
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A
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19<\/p>\n
B<\/p>\n
C<\/p>\n
D<\/p>\n
E<\/p>\n
F<\/p>\n
G<\/p>\n
Final Examination
FINC 5880
Week 9
Question 2. (20 points) Tundra Corporation is interested in acquiring Tantrell Corporation. Tantrell has 2 million shares
outstanding and a target capital structure consisting of 40 percent debt. The debt interest rate is 8 percent. Assume that the
risk-free rate of interest is 3 percent and the market risk premium is 7 percent.
Tantrell\u2019s free cash flow (FCF0) is $3 million per year and is expected to grow at a constant rate of 6 percent a year; its beta is
1.2. Tantrell has $5 million in debt. The tax rate for both companies is 30 percent.<\/p>\n
20 a. Calculate the required rate of return on equity using equation: r s= rRF + RPM(b)
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27 b. Calculate weighted average cost of capital, using equation: WACC = W drd(1-%) + wsrs
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39 c. Calculate the value of operations, using equation: V ops = FCF0(1+g)\/WACC \u2013 g)
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45 d. Calculate the value of the company\u2019s equity, using equation: Vs = Vops \u2013 debt
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52 e. Calculate the current value of the company\u2019s stock, using equation:
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Price per share = Vs\/shares outstanding<\/p>\n
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E<\/p>\n
Final Examination
FINC 5880
Week 9<\/p>\n
1<\/p>\n
Question 3. (20 points) Corizon Company\u2019s balance sheet and income statement are shown below (in millions of dollars).
Corizon and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $5 preferred will be
exchanged for one share of $2.00 preferred with a par value of $50 plus one 10 percent subordinated income debenture with a
par value of $50. The $8 preferred issue will be retired with cash. The company\u2019s tax rate is 30 percent.<\/p>\n
Current Assets
Net fixed assets<\/p>\n
Total assets<\/p>\n
Current
175.0
183.0<\/p>\n
358.0<\/p>\n
Current liabilities
Advance payments
$5 preferred stock, $100 par value (1,000,000) shares
$8 preferred stock, no par, callable at 100 (80,000 shares)
Common stock, $1.00 par value (5,000,000) shares
Retained earnings
Total claims<\/p>\n
Current
150.0
10.0
100.0
8.0
5.0
85.0
358.0<\/p>\n
Income Statement
Net sales
Operating expense
Net operating income
Other income
EBT
Taxes
Net income
Dividends on $5 PS
Dividends on $8 PS
Income to Common SHs<\/p>\n
Current
600.0
550.0
50.0
10.0
60.0
18.0
42.0
5.0
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36.4<\/p>\n
a. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at its par value.<\/p>\n
b. Construct the pro forma income statement after reorganization takes place. How does the recapitalization affect net income
available to common stockholders?<\/p>\n
c.<\/p>\n
What are the required pre-tax earnings before and after the recapitalization?<\/p>\n
d. Calculate the debt ratio before and after the reorganization?<\/p>\n
e. Would the common stockholders be in favor of the reorganization? Why or why not?<\/p>\n
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H<\/p>\n
Final Examination
FINC 5880
Week 9<\/p>\n
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Question 4. (15 points) A Treasury bond futures contract settles at 95-8.
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a. Calculate the present value of the futures contract?
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e. Why do companies enter into futures contracts? Provide a specific example.
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Final Examination
FINC 5880
Week 9<\/p>\n
Question 5. (15 points) Your portfolio is diversified . It has an expected return of 10.0% and a
beta of 1.10. You want to add 200 shares of Tundra Corporation at $30 a share to your portfolio.
Tundra has an expected return of 14.0% and a beta of 1.50. The total value of the investor\u2019s
current portfolio is $18,000.
a. Calculate the expected return on the portfolio after the purchase of the Tundra stock?<\/p>\n
b. Calculate the expected beta on the portfolio after you add the new stock?<\/p>\n
c. Is your portfolio less risky or more risky than average? Explain.<\/p>\n
d. Will your portfolio likely outperform or underperform the market in a period when
stocks are rapidly falling in value?<\/p>\n
e. Is beta always an accurate predictor of a portfolio\u2019s performance? Explain?<\/p>\n
Page 5 of 6<\/p>\n
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Final Examination
FINC 5880
Week 9
Question 6. (15 points) Marcal Corporation is considering foreign direct investment in Asia. The company estimates that the project
would require an initial investment of $14 million. and generate positive cash flows of $2 million a year at the end of each of the next
20 years. The project\u2019s cost of capital is 12%.
a. Calculate the project\u2019s NPV.<\/p>\n
b. The company thinks there is a 50-50 chance that the Asian country will impose restrictions on the company in one year. If the
restrictions are imposed, cash flows will be $1,000,000 per year for 20 years. If restrictions are not imposed, cash flows will be
$3,000,000 per year for 20 years. In either case, the cost will remain at $14,000,000. If the company waits one year, what is the project\u2019s
NPV with restrictions and without restrictions.<\/p>\n
c. Calculate the value of the option if the company waits one year. Should the company wait or go ahead with the project now?<\/p>\n
d. Discuss 2-3 factors other than the value of the real option that the company should consider in making its decision.<\/p>\n
Click here to have a similar paper done for you by one of our writers within the set deadline at a discounted<\/a>\u2026<\/i><\/p>\n","protected":false},"excerpt":{"rendered":" Question 1. (15 points) Kern Corporation entered into an agreement with its investment banker to sell 10 million shares of the company\u2019s stock with Kern netting $210 million dollars from the offering. The expected price to the public was $25 Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-181301","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/181301","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=181301"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/181301\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=181301"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=181301"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=181301"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}