{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}


ps%20Capital%20Structure - Finance 100 Problem Set Capital...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Finance 100 Problem Set Capital Structure 1. Halflever, Inc. is financed half by debt and half by equity. You have the following data: r E =?? r D = 12% r A =?? β E = 1 . 5 β D =?? β A =?? r f = 10% r M = 18% D/E = 1 Please fill in the blanks. 2. The chairman of Slack decides that the company should increase the propor- tion of debt in its capital structure. Currently the company has 10% debt in its capital structure, and an equity beta of 0.8. The debt is considered risk free and yields an expected return of 5%, whereas the stock market expected return is 13%. The market capitalization of the company is currently $360 million. The chairman of Slack thinks that she can increase the proportion of debt to 60% by paying a one-time special dividend and issuing debt for the amount of this dividend. Then debt would have an expected return of 6%. 2.a What is the debt beta, the asset beta, and the cost of capital of the company before the refinancing? What is the risk premium on the stock market? 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2.b What is the total value of the company before the recapitalization? What is the amount of debt issued and the dividend paid? 2.c What is the beta of the common stock and debt after the refinancing? What is the required rate of return on the common stock after the refinancing? 2.d How has the wealth of each individual shareholder changed? Assume that the debt is privately placed, so shareholders do not buy the debt issued. 2.e Using the same assumptions as in 2.d , how has the beta of the portfolio of the holders of common stock changed as a result of the refinancing? How could the shareholders invest in the market portfolio to restore the risk of their portfolio to what it was before the refinancing? 3. Company Upstart goes public. In order to value the company the investment bank that underwrites the offering needs to value Upstart. An important
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}