Question 1

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Luther is a successful logistical services firm that currently has $5 billion in cash.Luther has decided to use this cash to repurchase shares from its investors,and has already announced the stock repurchase plan.Currently Luther is an all-equity firm with 1.25 billion shares outstanding.Luther's shares are currently trading at $20 per share.
-With perfect capital markets,what is the market price per share of Luther's stock after the share repurchase?

Accepted Answer

In perfect capital markets, the share repurchase does not affect the stock price. Luther's market capitalization is $25 billion (1.25 billion shares * $20/share). After repurchasing $5 billion worth of shares, the market capitalization becomes $20 billion, but the number of shares decreases proportionally, keeping the price per share at $20.

Question 2

Use the information for the question(s)below.
Consider two firms,With and Without,that have identical assets that generate identical cash flows.Without is an all-equity firm,with 1 million shares outstanding that trade for a price of $24 per share.With has 2 million shares outstanding and $12 million in debt at an interest rate of 5%.
-Assume that MM's perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying With stock.Using homemade (un)leverage you invest enough at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock? The number of shares of With stock you purchased is closest to:

Accepted Answer

Since With and Without have identical assets that generate identical cash flows, their stock should have the same value. Without has 1 million shares outstanding trading at $24 per share, which means its total market value is $24 million. Therefore, each share of Without represents 1/1,000,000 of the ownership of the company, and every $24 invested in Without buys one share.

With has 2 million shares outstanding and $12 million in debt, which means its total market value is also $24 million ($12 million in debt plus $12 million in equity). Therefore, each share of With represents 1/2,000,000 of the ownership of the company, and every $24 invested in With buys 1/2,000,000 of the company.

To achieve the same payoff as a $5,000 investment in Without, we need to invest $5,000 / $24 = 208.33 shares of Without. Since each share of With is only 1/2 as valuable as a share of Without (due to the debt), we need to buy twice as many shares of With to achieve the same payoff. Therefore, we need to buy 208.33 x 2 = 416.67 shares of With. However, this only gives us the same payoff as a $5,000 investment in Without before interest. Since With also has $12 million in debt, we need to invest additional money at the risk-free rate to cover the interest payments on the debt. The interest payments are $12 million x 0.05 = $600,000 per year, which means we need to invest an additional $600,000 / 0.05 = $12 million at the risk-free rate. Therefore, we need to invest a total of $12 million + $5,000 = $12,005,000 to achieve the same payoff as a $5,000 investment in Without after interest. Investing $12,005,000 / $24 per share = 500,208.33 shares of With, or rounding to the nearest whole share, 425 shares of With.

Question 3

Use the information for the question(s)below.
Luther is a successful logistical services firm that currently has $5 billion in cash.Luther has decided to use this cash to repurchase shares from its investors,and has already announced the stock repurchase plan.Currently Luther is an all-equity firm with 1.25 billion shares outstanding.Luther's shares are currently trading at $20 per share.
-The market value of Luther's non-cash assets is closest to:

Accepted Answer

The total market value of Luther is the sum of its cash and non-cash assets. With 1.25 billion shares at $20 each, the total market value is $25 billion. Subtracting the $5 billion in cash, the market value of non-cash assets is $20 billion.

Question 4

Use the information for the question(s)below.
Luther is a successful logistical services firm that currently has $5 billion in cash.Luther has decided to use this cash to repurchase shares from its investors,and has already announced the stock repurchase plan.Currently Luther is an all-equity firm with 1.25 billion shares outstanding.Luther's shares are currently trading at $20 per share.
-Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.After the repurchase how many shares will Luther have outstanding?

Accepted Answer

Luther will use the $5 billion to repurchase shares at $20 per share, which means they will buy back 0.25 billion shares ($5 billion / $20 per share). Originally, there were 1.25 billion shares, so after the repurchase, there will be 1.0 billion shares remaining (1.25 billion - 0.25 billion).

Question 5

Use the information for the question(s)below.
Luther is a successful logistical services firm that currently has $5 billion in cash.Luther has decided to use this cash to repurchase shares from its investors,and has already announced the stock repurchase plan.Currently Luther is an all-equity firm with 1.25 billion shares outstanding.Luther's shares are currently trading at $20 per share.
-After the repurchase how many shares will Luther have outstanding?

Accepted Answer

We are told that Luther currently has 1.25 billion shares outstanding, and that they will be repurchasing shares. We are not told how many shares will be repurchased, but we know that the number of shares outstanding will be reduced. Therefore, the number of shares outstanding after the repurchase will be less than 1.25 billion. The only answer choice that satisfies this is B) 1.0 billion shares outstanding, which is a 20% reduction from the original 1.25 billion.

Question 6

Use the information for the question(s)below.
Consider two firms: firm Without has no debt,and firm With has debt of $10,000 on which it pays interest of 5% per year.Both companies have identical projects that generate free cash flows of $1000 or $2000 each year.Suppose that there are no taxes,and after paying any interest on debt,both companies use all remaining free cash flows to pay dividends each year.
-Fill in the table below showing the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows:

Accepted Answer

The answer of Use the information for the question(s)below.
Consider two...

Question 7

Use the following information to answer the question(s)below.
Galt Industries has no debt,total equity capitalization of $600 million,and an equity beta of 1.2.Included in Galt's assets is $90 million in cash and risk-free securities.Assume the risk-free rate is 4% and the market risk premium is 6%.
-Galt's enterprise value is closest to:

Accepted Answer

Galt's enterprise value is calculated by subtracting cash and risk-free securities from the total equity capitalization: $600 million - $90 million = $510 million.

Question 8

What is a market value balance sheet and how does it differ from a book value balance sheet?

Accepted Answer

The answer of What is a market value balance sheet...

Question 9

Suppose that Rearden Metal currently has no debt and has an equity cost of capital of 12%.Rearden is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock.Assume perfect capital markets.If Rearden borrows until they achieved a debt-to-equity ratio of 50%,then Rearden's levered cost of equity would be closest to:

Accepted Answer

In perfect capital markets, the levered cost of equity can be calculated using the formula: Levered Cost of Equity = Unlevered Cost of Equity + (Unlevered Cost of Equity - Cost of Debt) * (Debt/Equity). Substituting the given values: 12% + (12% - 6%) * 0.5 = 15%.

Question 10

Use the information for the question(s)below.
Consider two firms: firm Without has no debt,and firm With has debt of $10,000 on which it pays interest of 5% per year.Both companies have identical projects that generate free cash flows of $1000 or $2000 each year.Suppose that there are no taxes,and after paying any interest on debt,both companies use all remaining free cash flows to pay dividends each year.
-Suppose you own 10% of the equity of With.What is another portfolio you could hold that would provide you with the same cash flows?

Accepted Answer

The answer of Use the information for the question(s)below.
Consider two...

Question 11

Suppose that Taggart Transcontinental currently has no debt and has an equity cost of capital of 10%.Taggart is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock.Assume perfect capital markets.If Taggart borrows until they achieved a debt-to-value ratio of 20%,then Taggart's levered cost of equity would be closest to:

Accepted Answer

In perfect capital markets, the levered cost of equity can be calculated using the formula: Levered Cost of Equity = Unlevered Cost of Equity + (Debt/Equity) * (Unlevered Cost of Equity - Cost of Debt). With a debt-to-value ratio of 20%, the equity-to-value ratio is 80%. Therefore, Debt/Equity = 0.25. Plugging in the values: 10% + 0.25 * (10% - 6%) = 11%.

Question 12

Use the following information to answer the question(s)below.
Galt Industries has no debt,total equity capitalization of $600 million,and an equity beta of 1.2.Included in Galt's assets is $90 million in cash and risk-free securities.Assume the risk-free rate is 4% and the market risk premium is 6%.
-Galt's asset beta (i.e.the beta of its operating assets)is closest to:

Accepted Answer

The answer of Use the following information to answer the...

Question 13

Use the information for the question(s)below.
Luther is a successful logistical services firm that currently has $5 billion in cash.Luther has decided to use this cash to repurchase shares from its investors,and has already announced the stock repurchase plan.Currently Luther is an all-equity firm with 1.25 billion shares outstanding.Luther's shares are currently trading at $20 per share.
-Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.The market value of Luther's non-cash assets is closest to:

Accepted Answer

The market value of Luther's non-cash assets is $22 billion. This is calculated by taking the current market value of Luther's shares ($20 per share) and multiplying it by the number of shares outstanding (1.25 billion shares). This gives us a market value of $25 billion. We then subtract the value of Luther's stock options ($2 billion) to get the market value of Luther's non-cash assets, which is $22 billion.

Question 14

Louie's Truck Repair has assets with a market value of $8000.The company has three types of securities: equity,$2500 of debt,and 100 warrants that are fairly priced at $20 each.What is the value of Louie's equity?

Accepted Answer

The market value of the assets is $8000. The debt is $2500, and the warrants are valued at 100 * $20 = $2000. Therefore, the equity value is $8000 - $2500 - $2000 = $3500.

Question 15

Consider the following equation: E + D = U = A
The E in this equation represents:

Accepted Answer

The equation E + D = U = A represents the balance sheet identity where E is the value of the firm's equity, D is the value of the firm's debt, U is the value of the firm's unlevered equity, and A is the market value of the firm's assets. Here, E specifically represents the value of the firm's equity.

Question 16

Use the information for the question(s)below.
Consider two firms: firm Without has no debt,and firm With has debt of $10,000 on which it pays interest of 5% per year.Both companies have identical projects that generate free cash flows of $1000 or $2000 each year.Suppose that there are no taxes,and after paying any interest on debt,both companies use all remaining free cash flows to pay dividends each year.
-Suppose you own 10% of the equity of Without.What is another portfolio you could hold that would provide you with the same cash flows?

Accepted Answer

The answer of Use the information for the question(s)below.
Consider two...

Question 17

Use the information for the question(s)below.
Consider two firms,With and Without,that have identical assets that generate identical cash flows.Without is an all-equity firm,with 1 million shares outstanding that trade for a price of $24 per share.With has 2 million shares outstanding and $12 million in debt at an interest rate of 5%.
-Assume that MM's perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying Without stock.Using homemade leverage,you borrow enough in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5000 investment in With stock.The number of shares of Without stock you purchased is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
Consider two...

Question 18

Use the information for the question(s)below.
Luther is a successful logistical services firm that currently has $5 billion in cash.Luther has decided to use this cash to repurchase shares from its investors,and has already announced the stock repurchase plan.Currently Luther is an all-equity firm with 1.25 billion shares outstanding.Luther's shares are currently trading at $20 per share.
-With perfect capital markets,what is the market value of Luther's equity after the share repurchase?

Accepted Answer

The answer of Use the information for the question(s)below.
Luther is...

Question 19

Use the information for the question(s)below.
Consider two firms,With and Without,that have identical assets that generate identical cash flows.Without is an all-equity firm,with 1 million shares outstanding that trade for a price of $24 per share.With has 2 million shares outstanding and $12 million in debt at an interest rate of 5%.
-Assume that MM's perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying With stock.Using homemade (un)leverage,how much do you need to invest at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock?

Accepted Answer

Since Without is an all-equity firm, its price is simply equal to its total market value, which is $1 million shares times $24 per share, or $24 million. Therefore, a $5000 investment in Without would correspond to a stake in the company of $5000/$24 million, or approximately 0.2083%.

With, on the other hand, has a total market value of $24 per share times 2 million shares plus $12 million of debt, or $60 million. Therefore, to match the payoff of a $5000 investment in Without, we need to find the amount of money that corresponds to a 0.2083% stake in With.

Let X be the amount we need to invest in the risk-free rate. Then the total amount in our account will be $5000 + X after some time has passed. Since With has 2 million shares outstanding, a 0.2083% stake in the company is equal to 41660 shares. Therefore, the value of our investment in With will be 41660 shares times $24 per share, or $999840. We also earn interest on our investment in the risk-free rate, which is equal to X times 1.05 after some time has passed.

The total value of our account is therefore $999840 + $1.05X after some time has passed. This should be equal to $5000 + X, since we want the payoff to be the same as a $5000 investment in Without. Therefore, we can solve for X as follows:

$999840 + $1.05X = $5000 + X
$994840 = $0.05X
X = $994840/$0.05
X = $1989680

Therefore, we need to invest $1989680 - $5000 = $1984680 in the risk-free rate. However, we only have $5000 to invest, so we need to borrow $1984680 - $5000 = $1979680 at the risk-free rate. Since we can borrow and lend at the same rate, this investment in the risk-free rate will exactly offset our investment in With, resulting in a payoff that is the same as a $5000 investment in Without.

Therefore, we only need to invest $2500 of our own money in With, and then borrow $1979680 at the risk-free rate. The answer is C) $2500.

Question 20

Use the following information to answer the question(s)below.
Galt Industries has no debt,total equity capitalization of $600 million,and an equity beta of 1.2.Included in Galt's assets is $90 million in cash and risk-free securities.Assume the risk-free rate is 4% and the market risk premium is 6%.
-Galt's WACC is closest to:

Accepted Answer

The answer of Use the following information to answer the...

Quiz 14: Capital Structure in a Perfect Market

What is a market value balance sheet and how does it differ from a book value balance sheet?

Louie's Truck Repair has assets with a market value of $8000.The company has three types of securities: equity,$2500 of debt,and 100 warrants that are fairly priced at $20 each.What is the value of Louie's equity?

Consider the following equation: E + D = U = A The E in this equation represents: