1. Purchasers of stock options A) own a financial asset with benefits of firm ownership. B) have a claim on the profits of the firm issuing the underlying securities. C) have the obligation to buy or sell a predetermined amount of shares at the strike price. D) have the right to buy or sell a certain number of underlying shares.
c. Purchase stocks of Brown Group, Inc. only. Solution: 1. Calculate the Standard Deviation and Covariance of the Vanguard index, California R.E.I.T., & Brown Group, Inc. * Standard Deviation - In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility. In short, it measures the risk in each set of stocks.
The practice of business valuation The first method of business valuation, discounted cash flow (the "DCF"), is based on the idea that the economic value of the asset is equal to the amount of future cash flow Company updated to reflect its risk. The discount rate used is the weighted average cost of capital. Is calculated as follows: • cash flows discounted at the explicit forecast horizon (visibility of the company); • the terminal value from estimating a growth rate to infinity; • the value of equity is the difference between the asset value and the resulting economic value of the bank debt and net financial and possibly other elements. The second evaluation method, the method of multiple analog approach is compared with other companies in the same sector. In this approach, the economic value of the assets of a company is the result of a multiple of its earnings: operating profit multiple or multiple of EBITDA.
Instructions: Complete the following table: Case A Case B Case C a. Cash inflow on the issuance date b. Total cash outflow through maturity c. Total borrowing cost over the life of the bond issue d. Interest expense for the year ended December 31, 20X1 e. Amortization for the year ended December 31, 20X1 f. Unamortized premium as of December 31, 20X1 g. Unamortized discount as of December 31, 20X1 h. Bond carrying value as of December 31, 20X1 3. Definitions of manufacturing concepts Interstate Manufacturing produces brass fasteners and incurred the following costs for the
cost of equity =I used the 20 year at 5.74%+Geometric mean=5.9%x most recent beta .69=9.81% Cost of Debt I used Yield to maturity to find cost of debt From Exhibit 4 PV= 95.60 N=40 (20years x 2) since its paid semiannually Pmt=-3.375 (6.75/2) FV=-100 Comp I = 3.58% (semiannual) 7.16% (annual) After tax cost of debt = 7.16%(1-38%) = 4.44% E = market value of the firm's equity To find Market value of Equity you multiply share price by amount of shares $42.09x273.3= 11503. D = market value of the firm's debt I valued book value of debt at 1,291 Then divide 11503/(11503+1291)=89.9 so the weight for debt is 10.1 percent When I calculated WACC 4.44%x.101+9.81%x.899= 9.27% Cohen made a few mistakes when she calculated her WACC. First, she used historical data in
2. What item costs and revenues are relevant to the decision of how many units of that item to stock? The item costs relevant to the decision of how many units of that item to stock are the liquidation costs if the item has not been demanded. The revenues related to this same decision are the contribution margins of that item if it has been demanded. The two are used in a way that balances these costs and revenues.
1. Provide the definitions of throughput, inventory and operational expense given in The Goal. How do they compare with the traditional definitions? Do you find them useful, and why? Throughput is the rate at which the system generates money through sales while inventory is all the money that the system has invested in purchasing things which it intends to sell.
EXERCISE 1-2 a. Investors put assets into the company with the expectation of sharing profits. Creditors lend assets to the company with the expectation of repayment of the principal plus interest on the loan. b. Kennedy Company Accounting Equation Event Assets = Liabilities + Stockholders’ Equity Cash Notes Payable Common Stock Retained Earnings Acquired assets $3,400 $1,600 $1,800 Incurred loss (1,600) (1,600) Balance $1,800 = $1,600 + $1,800 $(1,600) The cash balance of $1,800 will be distributed first to the creditors. Since the company owed $1,600 to creditors and there are sufficient funds to pay them, the creditors will receive $1,600.
Then it will show the calculations that will show the gains that Mason Machining, Inc. will get from this transaction. Next, will be an explanation of how Mason will recognize the gains. Next, the tax liability that will be incurred by Mason Machining, Inc. from this transaction will be explained. The next process will be to calculate the amount of gain the shareholder’s from Mason Machining, Inc. will be able to realize and recognize from the transfer of stocks and assets between the two corporations. The next process will be to explain how much tax liability the shareholder’s will incur from the transfer of stocks between the corporations.
This includes the cost of debt to debt holders and cost of equity (including preferred stock and common stocks) to shareholders. WACC is calculated considering the relative weights of each component of the capital structure- debt and equity, and is used to see if the investment is worth taking. So it is the minimum return that shareholders and creditors require for their investments with the company. Moreover, the WACC is calculated using the following equation: WACC = (Percentage of equity) x (Cost of equity) + (Percentage of debt) x (Cost of debt) WACC = [E/ (E + D)] x (Cost of equity) + [D/ (E + D)] x (Cost of debt) x (1-t) It is important to estimate a firm’s cost because it affects the capital budgeting, financing methods and the performance of the firm. For each one the WACC has different importance.