1. ABC Corp. is considering expansion of its production capacity by investing in a project with the following unlevered cash flows (UCF):
Year 0: -$20 million
Year 1: +$5 million
Year 2: +$8 million
Year 3 and all future years: +$10 million
ABC Corp. will finance this expansion both with internal cash and by selling $10 million in bonds. The bonds pay interest of 10%. The expected return on ABC’s stock is 20% and firm is expected to maintain a debt-equity ratio of 1 for the foreseeable future. The corporate income tax rate is 20%. Ignoring the costs of financial distress and issue costs; calculate the net present value of this project using the Flow-To-Equity (FTE) approach. 2. Thani Mint Company has a debt to equity ratio of…show more content… 7. A firm has 100,000 shares of stock currently outstanding. Each share currently has a true value of $70. Suppose the firm issues 20,000 shares of new stock at the following prices: (a) $80, (b) $70, and (c) $60. The firm takes the funds raised in the issue and invests in securities (i.e., a 0 NPV project). What will be the effect of each of the alternative offering prices on the long-run market price of the shares after the issue assuming that in the long-run the market price for the stock will reflect the stock’s true value? (Ignore issues such as taxation and transactions costs) 8. City Tire has issued 100 convertible bonds with a conversion ratio of 20. Currently the bonds have not been converted and City Tire has 8,000 shares of common stock outstanding.
(a) If the convertible bondholders convert their bonds into stock, how many shares of City Tire stock will be outstanding?
(b) If the stock price is $30, what is the conversion value of the bonds?
(c) The convertible bonds are approaching maturity. On the maturity date each bondholder who has not converted is entitled to a final payment of $1000. What is the lowest stock price at which a convertible bondholder would find it in his/her interest to convert the bonds before they mature?
9. A firm wants to raise capital by issuing some securities. Its
