Finance Answers

Explain a quistclose trust and how it arises. 5marks

Smart Toys, currently has no debt, expects an EBIT of $45,000 every year forever. Its cost of equity is 16 percent. The corporate tax rate is 30 percent. The company can borrow at 8 percent.

a. What is the current value of the company? 

b. What will the value of the firm be if the company takes on debt equal to 20 percent of its unlevered value? What if it takes on debt equal to 60 percent of its unlevered value? 

c.  What will the value of the firm be if the company takes on debt equal to 55 percent of its levered value? What if the company takes on debt equal to 40 percent of its levered value?   

Under the tax rate of 40%, an unlevered firm Pacific Company’s WACC is currently 15 percent. The company can borrow at 6 percent.

a.   What is Pacific Company’s cost of equity? 

b.   If the firm converts to 30 percent debt, what will its cost of equity be? 

c.   If the firm converts to 55 percent debt, what will its cost of equity be? 

d.   What is Pacific Company’s WACC in part (b)? In part (c)?   

Ford Motor, an auto manufacturer, is debating whether to convert its all-equity capital structure to one that is 40 percent debt. Currently there are 8,000 shares outstanding and the price per share is $60. EBIT is expected to remain at $64,000 per year forever. The interest rate on new debt is 5.5 percent, and there are no taxes.

a. If the firm has a 100% dividend payout rate, what is the cash flow under the current capital structure to David who owns 160 shares of Ford Motor stock?

b. Assume David keeps all 160 of his shares. What will his cash flow be under the proposed capital structure of the firm?

c. Suppose David prefers the current all-equity capital structure, but Ford Motor does convert. Show how he could unlever his shares of stock to recreate the original capital structure.

d. Using your answer to part (c), is Ford Motor’s choice of capital structure relevant? Explain. 

Explain the anti competitive conduct in the banking industry as provided by the banking and financial services Act of 1994

What are the torts related to banks? 7marks

You are reviewing a financial model prepared by someone who hasn't taken MKM704. The proposal being analyzed requires an upfront

investment of $8.0 million and the company has a hurdle rate of 12%. The output from the individual's model shows a NPV of $1.2 million and

an IRR of 10.5%. What do you conclude about the analysis and why?

For Mr. Crowder, the Ferrari is a specialty good. What kind of product would it be for you? Why?

 For Mr. Crowder, the Ferrari is a specialty good. What kind of product would it be for you? Why?

Assume that you have $1000,000. You are asked to construct a portfolio and you are asked to;

1. Indicate performance of your portfolio for at least 2 weeks.

2. Make sure that you have excel toshow performance of your portfolio

3. Use word documents to explain  the strategy for two weeks.