a4 - ACTSC 372 Assignment 4 due on 1[3 points You own 100...

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ACTSC 372 – Assignment 4 – due on March 30, 2007 1. [3 points] You own 100 shares of Remko Inc., which will pay a dividend of $2.50 per share at the end of each year for the next two years. Three years from now, Remko Inc. will close and the liquidating value returned to the shareholders will be $16.5 per share. The required return on Remko’s stock is 13%. (a) What is the current price of Remko’s stock? (b) If you prefer to receive an equal amount of money every year in each of the next three years, how can you accomplish this (only using transactions on Remko’s stock)? 2. [3 points] Jensen Inc. currently has a debt-to-equity ratio of 30%, and the required return on the firm’s levered equity is 17%. The applicable corporate tax rate is 35%. Jensen Inc. is considering a project that requires an initial investment of 14 million, and that will generate after-tax cash flows of 3, 7 and 8 millions at the end of year 1, 2, and 3, respectively. Jensen is planning to issue 4.5 million in debt to partially finance the project. The company’s borrowing rate is 9%. The loan contract specifies
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