Asked by MasterPartridgePerson169

# My cat 4. (20 points total) During the upcoming year, the stock...

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1. (20 points total) Stiphla Inc.'s real assets are expected to generate earnings before interest and taxes (EBIT) of $102,000 at the end of every year in perpetuity. The firm is currently financed by 50,000 shares each worth $6.11 and by $130,000 worth of perpetual debt issued at a rate of 12%. The corporate tax rate is 35%. Ignore personal taxes and bankruptcy costs. a. (2 points) What is the current total firm value of Stiphla Inc.? b. (3 points) What is the current expected return on Stiphla's equity? C. (2 points) What is Stiphla's weighted average cost of capital (WACC)? d. (2 points) Show that the value of the firm can be obtained by discounting its after-tax earnings at the weighted average cost of capital. Janine Finch, the CFO of the company, has just found out that Stiphla could issue an additional $130,000 worth of perpetual debt to buy back some equity. However, because the new debt will be junior to the original debt, Stiphla will have to pay a rate of 14% on that new debt. e. (2 points) What is the value of the firm after it goes ahead with the new debt issue? f. (4 points) What is the new expected return on the firm's equity? g. (2 points) Explain why the shareholders are better off (in terms of their total wealth). h. (3 points) What is Stiphla's new weighted average cost of capital (WACC)?

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4. (20 points total) During the upcoming year, the stock price of Delinquent Jesters Inc. (DJ) is expected to go up to $290 or down to $170 with equal probabilities. The beta of the stock is equal to 0.75. The annual riskfree rate is 10.5%, and the expected annual return on the market is 16.5%. You are interested in replicating and pricing a European call option on DJ's stock. The option has a strike price of $212, and will mature in one year. a. (4 points) What is the current price of DJ's stock? b. (6 points) Using the stock and borrowing/lending (at the riskfree rate), form a portfolio that will replicate the call option. How many shares of DJ will you buy/sell, and how much money will you borrow/lend? C. (3 points) Use the portfolio derived in part (b) to price the call option. d. (4 points) What is the beta and expected return of the call option? e. (3 points) Using the result from part (d), show that the price of the call option found in part (c) can also be derived by discounting the expected cash flow of the option.

Answered by umdovini

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