Ownership Considered Equity And Ownership Considered Debt Essay Sample
This work is due on Sunday February 24 @ Midnight in the Assignment # 3 booklet of Blackboard. Please post your work file. with your name in the file rubric. to the Assignment # 3 booklet in Blackboard.
Question # 1: ( Twenty Points )
( a ) . Why is stock ownership considered equity and bond ownership considered debt?
In finance you can believe of equity as ownership in any plus after all debts associated with that plus are paid off. For illustration. a auto or house with no outstanding debt is considered the owner’s equity because he or she can readily sell the point for hard currency. Stockss are equity because they represent ownership in a company. When a company needs money. the solution is to raise money by publishing bonds to a public market. Thousands of investors so each lend a part of the capital needed. Truly. a bond is nil more than a loan for which you are the loaner. The organisation that sells a bond is known as the issuer. You can believe of a bond as an IOU given by a borrower ( the issuer ) to a loaner ( the investor ) .
( B ) . I am sing purchasing a stock. the stock has a beta coefficient of 1. 5. the current hazard free rate in the market topographic point ( 10 twelvemonth T-Notes ) is 3. 0 % . and the market hazard premium is 5 % . What is the needed rate of return on this firm’s stock?
?stock = 1. 5
RFR = . 003
Rmarket = . 05
Tocopherol ( R ) = the needed rate of return
Tocopherol ( R ) = RFR + ?stock ( Rmarket – RFR )
Tocopherol ( R ) = 0. 03 + 1. 5 ( 0. 05 – 0. 03 )
Tocopherol ( R ) = 0. 03 + 1. 5 ( 0. 02 )
Tocopherol ( R ) = 3. 06 %
Question # 2: ( Twenty Points )
Sexton Inc. is sing Projects S and L. whose hard currency flows are shown below. These undertakings are reciprocally sole. every bit hazardous. and non quotable. Please find the NPV. IRR. Profitability Index and Payback for these two Undertakings.
WACC: 10. 25 %
Year 0 1 2 3 4
CFS – $ 2. 050 $ 750 $ 760 $ 770 $ 780
CFL – $ 4. 300 $ 1. 500 $ 1. 518 $ 1. 536 $ 1. 554
Question # 3: ( Twenty Points )
A stock is expected to pay a dividend of $ 0. 75 at the terminal of the twelvemonth. The needed rate of return is rs = 10. 5 % . and the expected changeless growing rate is g = 6. 4 % . What is the stock’s current monetary value?
D1 = $ 0. 75
R = 10. 5 %
g = 6. 4 %
Po = Stock Current monetary value
Po = D1/ ( rs – g )
Po = $ 0. 75/ ( . 105 – . 064 )
Po = $ 18. 29
Question # 4: ( Twenty Points )
You were hired as a adviser to Giambono Company. whose mark capital construction is 40 % debt and 60 % common equity. The firm’s involvement rate on debt is 8. 0 % and their revenue enhancement rate is 25 % . The cost of common equity utilizing retained net incomes is 12. 75 % . What is its WACC?
rD = . 008
Tc = . 25
D/V = . 40
rhenium = . 1275
E/V = . 60
WACC = rd ( 1-Tc ) * ( D/V ) +re* ( E/V )
WACC = . 008 ( 1- . 25 ) * . 40+ . 1275* . 60
WACC = . 0024+ . 0765
WACC = 7. 89 %
Question # 5: ( Twenty Points )
( a ) . Which of the followers is NOT a relevant hard currency flow and therefore should non be reflected in the analysis of a capital budgeting undertaking? a. Changes in net working capital.
B. Transportation and installing costs.
c. Cannibalization effects.
d. Opportunity costs.
e. Sunk costs that have been expensed for revenue enhancement intents.
( B ) . A company is sing a new undertaking. The CFO plans to cipher the project’s NPV by gauging the relevant hard currency flows for each twelvemonth of the project’s life ( i. e. . the initial investing cost. the one-year operating hard currency flows. and the terminal hard currency flow ) . so dismissing those hard currency flows at the company’s overall WACC. Which one of the undermentioned factors should the CFO be certain to INCLUDE in the hard currency flows when gauging the relevant hard currency flows?
a. All sunk costs that have been incurred associating to the undertaking. B. All involvement disbursals on debt used to assist finance the undertaking. c. The investing in working capital required to run the undertaking. even if that investing will be recovered at the terminal of the project’s life. d. Sunk costs that have been incurred associating to the undertaking. but merely if those costs were incurred prior to the current twelvemonth. e. Effectss of the undertaking on other divisions of the house. but merely if those effects lower the project’s ain direct hard currency flows.