Suppose the stock price is $25, there are 1.5 million shares of stock, the firm has $13.5 million of preferred stock, and $62 million of debt. Estimate
The total value
The WACC weights.
Write the WACC formula with the corresponding weights.
Estimate the cost of debt. Assume that you are issuing a 10 yr, 6% semiannual bond that sells for $1,015.72. (Use the excel formula)
Illustrate the before-tax cost of debt by showing the corresponding time line.
If the tax rate is 40%, what is the after-tax cost of debt?
What role do flotation costs play in the cost of debt? Explain.
Estimate the annual and quarterly cost of issuing preferred stock (use the cost of preferred stock formula studied in class). Assume the price of preferred stock is $104.35, 4% dividend,
$100 par (face) value and flotation costs (F) of 5%.
Draw the time line of preferred stock. Remember that dividends are paid quarterly.
Make sure your result is correct by estimating the cost of issuing preferred stock using the corresponding excel formula.
Use the CAPM Cost of Equity model to determine the cost of issuing common stock. Assume that the risk free rate is 3.2%, the market risk premium is 4% and the estimate of beta is 0.98.
Re write the WACC formula, substituting the values you have found in all the previous questions.
What is the hurdle rate? What does it mean? Explain.
Define an agency relationship.
If you are the only employee, and only your money is invested in the business, would any agency problems exist? Explain.
Would hiring additional people create agency problems? Explain.
Define the concept of Corporate Governance.
Suppose the government is running a budget deficit (previously the budget was balanced). Explain in detail what happens in the following markets:
Loanable Funds Market (draw a diagram)
Net Capital Outflow (draw a diagram)
Foreign-Currency Exchange (draw a diagram)
US Net exports
The January 29, 2014 nominal exchange rate for the following currencies were as follows:
Indirect Quotation January 29, 2014
Canadian Dollar 1.12
Euro 0.73
Japanese yen 102.34
Mexican Peso 13.41
Find the indirect quotation for December 4, 2015 and determine whether the currencies have appreciated or depreciated, and by how much.
For each currency, explain what is happening in the Foreign-Currency exchange market and in the trade balance between the US and each of these countries.
A Big Mac costs $3.50 in U.S., 60 pesos in Mexico. The nominal exchange rate is e = 17.05 pesos per $USD. Compute the real exchange rate.
Does the real exchange rate follows the “law of one price”? (i.e. follows the Purchasing Power Parity condition?). If it does not, what would be exchange rate according to the PPP condition? Explain.
If the CPI inflation rate is 12% in Mexico and 2% in the US, what will happen to the exchange rate? Explain.
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