Scribd
Upload
712 views2 pages

Xmaple

Uploaded by

Bishwanath Das
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as TXT, PDF, TXT or read online on Scribd
712 views2 pages

Xmaple

Uploaded by

Bishwanath Das
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as TXT, PDF, TXT or read online on Scribd
You are on page 1/ 2

1. What are the three key activities of financial manager?

Related to the firms


balance sheet?

2. What happens to the cost of debt and equity when the financial leverage
increase and why?

3. MM’s proposition 1 in a world of no taxes implies that an issue of debt


increases expected earnings per share and leads to an offsetting fall in the price-
earnings ratio. Explain?

4. Under what circumstance, would a firm like to favor risky project with
negative NPVs?

5. What does free cash flow hypothesis has implication for capital structure?

6. It is empirically observed that, “when a firm issues new secondary equity to


the market the share price of the firm fails” How can you explain the above
phenomenon?

7. Can you infer the characteteristies of the firms based on its consecutive OCF
and FCF?

1. Calculate the PV of interest- tax shield on Tk. 100,000, two years loan at 9
per cent interest rate, in a perfect capital market, if the firm is in the 40 per
cent tax bracket.

2. At the end of 2012 the long term debt to market value of equity ratio of
prime textile was 5%.

1) Suppose that prime textile has decided to issue Tk. 50 million of long term
debt. The goal is to roll over this debt (i.e. replace it by another Tk. 50
million issue) when it matures. Suppose that prime textile’ s marginal corporate
tax rate is 40% , that the effective personal tax rate on equity income is 0% and
that effective personal tax rate on debt income is 25% . What is the gain from
adding Tk. 50 million of debt to the current capital structure assuming that tax
are the sole determine of the gain from leverage?

2) If only taxes are relevant, what would apex spinning’s market value of equity
have been at the end of 2012 if it were all equity finance. Assume a 40% corporate
tax rate and personal tax rates as listed in part
3) The market value of Apex Spinning’s equity was Tk. 100 million at the end of
2012.

3. Green Manufacturing Inc. plans to announce that it will issue Tk. 20 million
of perpetual debt and use the proceeds to repurchase common stock. The bond will
have a 6-percent annual coupon rate. Green is currently an all equity firm with
5,000,000 shares of common stock outstanding. After the sale of the bond, Green
will maintain the new capital structure indefinitely, Green currently generates
annual pretax earnings of Tk. 25 million. This levels of earnings is expected to
remain constant in perpetuity. Green in subject to a corporate tax rate of 40 per
cent and the return on the firm’s assets is currently 15%
a) What is the value of Green Manufacturing Inc. before the announcement of the
debt issue? What is the market value per share of the firm equity?
b) Construct Green’s market- value balance sheet after the restructuring?
c) What is the required return on Green equity after the restructuring?
d) Calculate the value of Green Manufacturing Inc. using the Rwacc?

You might also like