Assume that a company has raised $2,000 in capital for investment projects: $1,000 is from bondholders...
Assume that a company has raised $2,000 in capital for investment projects: $1,000 is from bondholders and $1,000 is from stockholders. Assume that bonds have one year till maturity and an 8% interest rate. Project A is a low risk project with an up-front cost of $2,000. This project will give payoffs of $2,000 in weak market and $2,400 in strong market. The probabilities are 50% for each outcome. Project B is a high risk project with the same cost and payoffs equal to $0 (zero) if market is in turmoil and $4,400 if markets are stable.
a. Find expected payoff to bondholders and shareholders in case of Project A.
b. Find expected payoff to bondholders and shareholders for Project B.
c. Which investment project do shareholders prefer and why?
d. Which project do bondholders like the best? Why?
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Assume that a company has raised $2,000 in capital for investment projects: $1,000 is from bondholders...
Assume that a company has raised $2,000 in capital for investment projects: $1,000 is from bondholders...
Assume that a company has raised $2,000 in capital for investment projects: $1,000 is from bondholders and $1,000 is from stockholders. Assume that bonds have one year till maturity and an 9% interest rate. Project A is a low risk project with an up-front cots of $2,000. This project will give payoffs of $2,000 in weak market and $2,400 in strong market. The probabilities are 60% for strong market outcome, and the remaining probability is for the weak market. Project...
QUESTION 15 Table: Investment Projects Project Rate of return Cost A 16 % $1,000 13 $2,000...
QUESTION 15 Table: Investment Projects Project Rate of return Cost A 16 % $1,000 13 $2,000 C $500 D 5 $500 2 $10,000 Suppose the table shows all of the potential investment projects currently available in an economy. If the market interest rate were equal to 6%, the amount of investment spending would equal $ (Do not use a dollar sign)
1. (30 points) Bedrock Company has $70 million in debt and $30 million in equity. The...
1. (30 points) Bedrock Company has $70 million in debt and $30 million in equity. The debt matures in 1 year and has a 10% interest rate, so the company is promising to pay back $77 million to its debtholders 1 year from now. The company is considering two possible investments, each of which will require an upfront cost of $100 million. Each investment will last for 1 year, and the payoff from each investment depends on the strength of...
A company has a capital structure of 30% debt and 70% equity. They are considering a...
A company has a capital structure of 30% debt and 70% equity. They are considering a project that requires an investment of $2.6 million. To finance this project, they plan to issue 10-year bonds with a coupon interest rate of 12%. Each of these bonds has a $1,000 face value and will be sold to net the company $980. If the current risk-free rate is 7% and the expected market return is 14.5%, what is the weighted cost of capital...
Problem 5 (extra credit problem) Assume that the Marriott has the following joint distribution with the...
Problem 5 (extra credit problem) Assume that the Marriott has the following joint distribution with the market return. Under Bad, Good and Great states (that come with the probabilities 4, and , respectively) the market returns next year are (-5%, 15% and 35%) and the price of Marriott next year is expected to be, respectively: (S40m, $50m and S60m). Right now, Marriott has price of S44.00m and no debt. The risk free rate is 6.13%. You may find using a...
Three students have each saved $1,000. Each has an investment opportunity in which he or she...
Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates ot return on the students' investment projects: Return Student (Percent) Dmitri Jake Latasha18 Assume borrowing and lending is prohibited, so each student uses only personal saving to finance his or her own investment project. Complete the following table with how much each student will have a year later when the project pays its return Money...
Three students have each saved $1,000. Each has an investment opportunity in which he or she...
Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates of return on the students’ investment projects: Student Return (Percent) Carlos 4 Felix 7 Janet 15 Assume borrowing and lending is prohibited, so each student uses only personal saving to finance his or her own investment project. Now suppose their school opens up a market for loanable funds in which students can borrow and lend...
Company A just sold their most profitable division for $100 million in cash. The company has...
Company A just sold their most profitable division for $100 million in cash. The company has a market value balance sheet shown below (in millions). The bonds outstanding have an annual payment that is due in one month that equals 10% of the book value (400 x .10 = $40 million). Note: If the payment is not made on time it accrues a penalty of 1% or $400,000 per month unpaid: Assets BV MV Liabilities BV MV Cash $100 $100...
Company "Boats" Ltd. has no debt and its total market value is $ 2M. The profit...
Company "Boats" Ltd. has no debt and its total market value is $ 2M. The profit before interest and tax (EBIT) is expected to be either $50,000 during a recession, $150,000 during normal times, and $300,000 in an expansion period. "Boats" is considering issuing $500K debt at 4% interest. With the amount raised, the company intends to buy back shares from the public. There are currently 50,000 shares outstanding. Ignore taxes and assume that EPS is paid as a dividend...
7. Problems and Applications Q7 Three students have each saved $1,000. Each has an investment opportunity...
7. Problems and Applications Q7 Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates of return on the students' investment projects: Return (Percent) Student Tim Brian Crystal 15 Assume borrowing and lending is prohibited, so each student uses only personal saving to finance his or her own investment project. Complete the following table with how much each student will have a year later when...
QUESTION 15 Table: Investment Projects Project Rate of return Cost A 16 % $1,000 13 $2,000 C $500 D 5 $500 2 $10,000 Suppose the table shows all of the potential investment projects currently available in an economy. If the market interest rate were equal to 6%, the amount of investment spending would equal $ (Do not use a dollar sign)
1. (30 points) Bedrock Company has $70 million in debt and $30 million in equity. The debt matures in 1 year and has a 10% interest rate, so the company is promising to pay back $77 million to its debtholders 1 year from now. The company is considering two possible investments, each of which will require an upfront cost of $100 million. Each investment will last for 1 year, and the payoff from each investment depends on the strength of...
Problem 5 (extra credit problem) Assume that the Marriott has the following joint distribution with the market return. Under Bad, Good and Great states (that come with the probabilities 4, and , respectively) the market returns next year are (-5%, 15% and 35%) and the price of Marriott next year is expected to be, respectively: (S40m, $50m and S60m). Right now, Marriott has price of S44.00m and no debt. The risk free rate is 6.13%. You may find using a...
Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates ot return on the students' investment projects: Return Student (Percent) Dmitri Jake Latasha18 Assume borrowing and lending is prohibited, so each student uses only personal saving to finance his or her own investment project. Complete the following table with how much each student will have a year later when the project pays its return Money...
7. Problems and Applications Q7 Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates of return on the students' investment projects: Return (Percent) Student Tim Brian Crystal 15 Assume borrowing and lending is prohibited, so each student uses only personal saving to finance his or her own investment project. Complete the following table with how much each student will have a year later when...
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