Quiz 5 Solutions

# Quiz 5 Solutions - Quiz5 DueonDecember3...

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Quiz 5 Due on December 3 Questions 1 to 8 are based on the following information relating to company XYZ: Book value of assets = \$300,000, Book value common equity = \$150,000, Book value of debt =  \$100,000, Book value of preferred stock = \$50,000 Number of common shares outstanding = 10,000, Number of preferred shares = 1000 (face  value is \$50) Market price of common stock = \$20, Market price of preferred stock = \$60 Preferred dividend per share = \$6 Annual coupon rate on debt = 7.5%, Yield to maturity = 9%, Time to maturity = 15 years Beta of the stock = 1.10, risk free rate = 4%, expected return on market = 10% Tax rate = 40% Assume that there are no floatation costs. 1. What is market value of the firm? A. \$312,886 B. \$347,909 C. \$363,108 D. \$371,565 E. \$392,173 Solution: Number of bonds = 100,000 / 1,000 = 100

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Price of each bond: N = 15, PMT = 75, FV = 1,000, I/Y = 9, CPT PV = -879.09 Market value of debt = 879.09 x 100 = 87,909 Market value of common equity = \$20 x 10,000 = \$200,000 Market value of preferred equity = \$60 x 1,000 = \$60,000 Total market value of the firm = \$347,909 (add the above three values)  2. What is the weight of common equity?
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## This note was uploaded on 10/16/2010 for the course COMM Comm 308 taught by Professor Ravimateti during the Fall '09 term at Concordia Canada.

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Quiz 5 Solutions - Quiz5 DueonDecember3...

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