Ch16_Solutions+for+Extra+Problems2

Ch16_Solutions+for+Extra+Problems2 - Solutions to Problems...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Solutions to Problems for Ch.16 1. The Kelly Co. and the Green Co. are identical in every aspect except that Kelly is not levered, while Green has $2,000,000 in 12% bonds outstanding. There are no taxes and capital markets are perfect. The valuation of the firms is the following: Kelly Green EBIT $ 600,000 $ 600,000 Interest 0 240,000 EBT (NI) $ 600,000 $ 360,000 R E 15% 16% E $4,000,000 $2,250,000 D 0 2,000,000 V $4,000,000 $4,250,000 R A =R E = 15% 14.12% D/E 0 $2m/$2.25 = 88.89% a) Fill in the above blank fields E(Kelly) = cash flow/R E = $600,000/15% = $4,000,000 E(Green) = cash flow/R E (green) = $360,000/16%= $2,250,000 R A (Green) = WACC = ($2m/$4.25m)*12% + ($2.25m/$4.25m)*16% = 14.12% b) You own 10% of Green’s common stock. Show the process and amount by which you could reduce your outlay (improve your investment) through arbitrage. Green is overvalued. 1) sell the overvalued (Green’s stock): 10%*$2,250,000 = $225,000 2) borrow 10% of Green’s debt: 10%*$2,000,000 = $200,000 3) buy 10% of Kelly:
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/12/2010 for the course FNCE FNCE 3P93 taught by Professor Nd during the Fall '10 term at Brock University, Canada.

Page1 / 3

Ch16_Solutions+for+Extra+Problems2 - Solutions to Problems...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online