# sol3 - ACTSC 372 – Assignment 3 – due on 1[3 points(i...

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Unformatted text preview: ACTSC 372 – Assignment 3 – due on March 12, 2007 1. [3 points] (i) You own 100 shares of a firm whose total number of shares is 1000. N directors must be elected. If cumulative voting is used, how large must N be in order for you to make sure you will be able to elect at least one director? (ii) A firm has 1 million of outstanding shares and must elect 5 directors. If straight voting is used, how many shares do you need to own in order to make sure you will be able to elect at least one director? Would your answer change if there were 10 directors to elect? Solution: (i) N must be such that 100 ≥ 1000 N + 1 + 1 . Therefore, we must have N ≥ 1000 / 99- 1 = 9 . 101, which means N must be at least 10. (ii) You need 50% of the shares plus one, which amounts to 500,001 shares. The answer will be the same for any number of directors. 2. [3 points] ABC Corporation and XYZ Corporation are identical except for their capital structure. ABC is an all-equity firm with 10,000 outstanding shares currently worth \$36 per share. XYZ Corpo- ration has a debt with a market value of \$90,000. The cost of this debt is 8% per year. Both ABC and XYZ are expected to have annual earnings before interest and taxes of \$40,000 in perpetuity. Neither firm pays taxes. In the following, you can assume that every investor can borrow at the same rate (8%) as XYZ. (a) What is the value of ABC? (b) What is the market value of XYZ’s equity? (c) How much will it cost to purchase 20% of each firm’s equity? (d) Assuming each firm meets its earnings estimates, what will be the dollar return to each position in part (c) over the next year? (e) Consider the strategy where an investor purchases 20% of XYZ’s equity. Describe how the cost and dollar returnthe strategy where an investor purchases 20% of XYZ’s equity....
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sol3 - ACTSC 372 – Assignment 3 – due on 1[3 points(i...

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