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  • FIN 360 Mock Exam

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    Skrybe
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    A firm with 10 million shares outstanding needs to raise $ 100 million in new equity. A firm issues 500,000 rights at $ 10 per share to its existing stockholders. The value of the firm would tend to increase as debt is added to the capital structure. But there would be an offset in the form of the rising cost of bankruptcy.

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    A firm with 10 million shares outstanding needs to raise $ 100 million in new equity. A firm issues 500,000 rights at $ 10 per share to its existing stockholders. The value of the firm would tend to increase as debt is added to the capital structure. But there would be an offset in the form of the rising cost of bankruptcy.

    Drepturi de autor:

    Attribution Non-Commercial (BY-NC)
    Descărcați ca DOCX, PDF, TXT sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    208 vizualizări1 pagină

    FIN 360 Mock Exam

    Încărcat de

    Skrybe
    A firm with 10 million shares outstanding needs to raise $ 100 million in new equity. A firm issues 500,000 rights at $ 10 per share to its existing stockholders. The value of the firm would tend to increase as debt is added to the capital structure. But there would be an offset in the form of the rising cost of bankruptcy.

    Drepturi de autor:

    Attribution Non-Commercial (BY-NC)
    Descărcați ca DOCX, PDF, TXT sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    din 1

    1- You have been asked for advice on a rights offering by a firm with 10 million shares outstanding, trading at $ 50 per

    share. The firm needs to raise $ 100 million in new equity. Assuming that the rights subscription price is $ 25, answer the following questions: a. How many rights would be needed to buy one share at the subscription price? b. Assuming that all rights are subscribed to, what will the ex-rights price be? c. Estimate the value per right. d. If the price of a right were different (higher) than the value estimated in (c), how would you exploit the difference? 2- You are stockholder in a SmallTech Inc., a company that is planning to raise new equity. The stock is trading at $ 15 per share, and there are 1 million shares outstanding. The firm issues 500,000 rights at $ 10 per share to its existing stockholders. a. What is the expected stock price after the rights are exercised? b . If the rights are traded, what is the price per right? 3 - Nadir, Inc., an unlevered firm, has expected earnings before interest and taxes of $2 million per year. Nadir's tax rate is 40%, and the market value is V=E=$12 million. The stock has a beta of 1, and the risk free rate is 9%. [Assume that E(Rm)-Rf=6%] Management is considering the use of debt; debt would be issued and used to buy back stock, and the size of the firm would remain constant. The default free interest rate on debt is 12%. Since interest expense is tax deductible, the value of the firm would tend to increase as debt is added to the capital structure, but there would be an offset in the form of the rising cost of bankruptcy. The firm's analysts have estimated, approximately, that the present value of any bankruptcy cost is $8 million and the probability of bankruptcy will increase with leverage according to the following schedule:

    Value of debt $ 2,500,000 $ 5,000,000 $ 7,500,000 $ 8,000,000 $ 9,000,000 $10,000,000 $12,500,000

    Probability of failure 0.00% 8.00% 20.5% 30.0% 45.0% 52.5% 70.0%

    a. What is the cost of equity and WACC at this time? b. What is the optimal capital structure when bankruptcy costs are considered? c. What will the value of the firm be at this optimal capital structure? 4- AAA company made a rights issue at $5 a share of one new share for every 4 shares held. Before the issue, there were 10 million shares outstanding and share price was $6. abcdWhat is the total amount of new money raised? What is the value of a right to buy one new share? What was the prospective stock price after the issue? How far could the total value of the company fall before shareholders would be unwilling to take up their rights?

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