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Department
Economics for Management Studies
Course
MGEC72H3
Professor
Victor Barac
Semester
Fall

Description
Chapter 14 L = = 68 New share issued = 11,000-10,000=1000 Cost of capital = required return = discount rate Capital gain surplus = 1000 ($25-$1) = $24,000 Range from 62 to 67 Cost of equity CS = $11,000 DGM: P0= = RE= Chapter 16 Capital surplus = $204,000 (old + new surplus) R/E = $561,500 (old R/E – Selling P x share outstanding) Proposition I = the value of the firm is not affected by changes in the capital structure, the CF of the firm do 1/4 not change. Total equity = $776,500 g = -1 (using historical data) Proposition II = WACC of the firm is not affected by capital structure Stock split = cheaper and more shares g = ROE x Retention ration Reverse stock split = expensive and less shares = ROE (1 – payout ratio) Case I  No corporate or personal tax = ROE (1 – Do/EPS) RRC currently has outstanding shares = 150,000  No bankruptcy Selling for $65 SML: RE= Rf– βE[E(R )M– R )f What will share price be? And determine new no. of shares outstanding WACC = RA= (R E + (RD) Cost of debt R E = RA+ (RA– R D RRC has 5 for 3 stock splits = = $39 new shares = = 250,000 YTM using calc CAPM: RA= R f β AR –MR ) f RRC has 15% stock D = = $56 new shares = 150,000 (1.15) = 172,500 R E = Rf– βE(1+ )(R ) M R ) f Preferred stock: solve for r =Rp = return on preferred stock Has 4 for 7 reverse stock split = =$114 new shares = = 85,714 Case II P0= Rp =  Corporate tax Nz Inc predict the earnings in the coming yr = $75,000  No personal tax and no bankruptcy cost WACC = (RE) + (RD)(1 – T) There are outstanding shares of = 20,000 Maintain a debt-equity ratio = 3 V U all equity no debt E = market value of equity (no. of share outstanding x Price per share) V L V U DT leverage with debt (V L P/S x share outstanding + DT) Max investment fund available without issuing new equity = $75,000 + (3x$75, 000) = 300,000 D = market value of debt (no. of outstanding bonds x bond price) V = market value of firm (V = E + D = 1) E = VL– D To keep D/E ratio same, new borrowing should be = $300,000-75,000=$225,000 E/V = % financed with equity Suppose the firm use residual policy D/V = % financed with debt WACC = RA= (R E + (RD) (1-T) planned capital expenditures total = $81,000 R E = RU+ (R U R )D (1 – T) = 3 Chapter 22 Equity = ¼ WACC < R →Udebt financing is advantage Investment = $6,500,000 Cost of capital or cost of equity = R Debt = ¾ CCA rate = 23% U Equity portion of investment plan = x $81,000 = $20,250 Salvage = $480,000 Capital investment = $3,000 Residual = $75,000 - $20,250 = $54,750 N = 3 yrs Solely financed with common stock D per share = = $2.74 Tax = 34% Generate stready OCF = $5,000 per yr Borrow = 13%. After tax = 0.13(1-.34) = 8.58% Corporate tax = 38% New borrowing = $81,000 - $20,250 = $60,750 PMT lease $1,300,000. After tax = 1,300,000(1-.34) =$871,200 Equity required return for Vu= 10% Considering to raise = $750 debt Total D = $75,000 - $81,000 = $54,750 PVCCATS = x – x = $1,453,118 Interest on debt = 10% Add to R/E = $75,000 - $54,750 = $20,250 NAL = 6,500,000 – 871,000 - ) – - 1,453,118 CF to debt holder: = 6,500,000 - 871,000 – 1,541,313 – 374,966 - 1,453,118 = $2,259,403 V = 0 D per share under a residual policy = $75,000/20,000 = 3.75 U VL= DT = 750(.10) = 75 NAL > 0 the firm should lease it Rose own share = 2,000 NAL < 0 the firm should buy it Receive in 1 yr = $0.60 per share D CF to equity holder: nd V U EBIT (1-T) = 500(1-.38) = 310 2 yr, the company liquidating D at $36 per share Max lease PMT acceptance to firm: The required return on company stock = 7.5% VL= EBIT – interest (1-T) = 500 – 75 (1-.38) = 264 NAL = 0 = 6,500,000 – M (1.0858) PVIFA ( 8.58%, 3- 374,966 - 1,453,118 Total value of firm: P 0 + = $34 M (1.0858) PVIFA ( 8.58%, 3= 6,500,000 – 374,966 - 1,453,118 = 4,671,916 V U 3,100 V = 3,385 st PVIFA ( ): n= 3, r= 8.58%, PV = 2.55, PMT = 1 L Suppose you want in 1 yr = $650 total in D 8.58, 3 PV of total homemade D over these two yrs? M = = 1,687,009 Value of shareholder’s equity: V U total value of unlevered firm = 3,100 P 1 36/1.075 = $33 VL= V L D = 3,385 – 750 = 2,635 Total D currently receive = $.60 x 2000 shares = $1,200 Max PMT = = 2,556,075 You want in 1 yr = = $16 share Case III nd What if the firm security deposit of $210,00 and lease PMT is same CF at 2 yr = $36(2000 x $16) = $72,591 I = 6,500,000 – 210,000=6,290,000  Bankruptcy cost  D/E ↑ bankruptcy ↑, Value of firm ↓, WACC↑ due to more debt added PV of total homemade D = + = $63,420 Salvage=480,000-210,000=270,000 Everything else same Chapter 15 When no tax then no dep, no pvccats, pmt same, r same Chapter 17 Choosing a venture capital: Lee lnc declared = $6 per share D  Financial strength is important Asset cost = $340 Capital gain not taxed  Style is important CCA = 28% N = 10 yrs D tax = 15%  Reference are important Sells for = $80 per share  Contacts are important Salvage = 0 Tax = 38% About to go ex-D  Exit strategy is important What is ex-D price? Interest = 15%. After tax = .15(1-.38) =9.3% PMT = end of yr Issuing new securities: Ex-D = P –D (1-T) = 80 – 6 (1-.15) = 75  Public traditional negotiated cash offer – firm commitment cash offer, best effort cash Breakeven pt btw lessee and lessor: offer, dutch auction cash offer Owner’s equity of Nz Inc.  Privileged subscription – direct rights offer, standby rights offer PVCCATS = x = $93 CS ($1 par value) = $10,000 → 10,000 unit of shares  Nontraditional cash offer – shelf cash offe
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