question‚ as marks will not be awarded for answers that do not include workings. 5. Ensure you include your student number on your answer book. Question 1 (10 Marks) a) Beta estimation using a regression approach can sometimes give rise to the ‘standard error problem’. Describe this problem‚ and why it may produce a noisy beta estimate. What step may you take in order to address this? (2 Marks) b) Describe the process that you would take in estimating a firm’s cost of debt‚ using a synthetic rating
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Financial Leverage 3 M&M Proposition I: Capital Structure Irrelevance 4 M&M Proposition II: Capital Structure Irrelevance 4.1 4.2 M&M Proposition II With Riskless Debt . . . . . . . . . . . . . . . . . . . . . . . . M&M Proposition II with Riskless Debt: Betas . . . . . . . . . . . . . . . . . . . . 3 4 5 8 8 11 12 17 17 18 19 22 22 23 23 23 23 24 5 M&M I & II with Taxes: Riskless Debt and Tax Shields 6 M&M with Taxes & Cost of Financial Distress 6.1 6.2 6.3 Bankruptcy Costs . . . . . . . . . . . . .
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free rate‚ the beta‚ the market risk premium‚ the firm’s marginal tax rate‚ and its capital structure. Since Boeing has two business componentsdefense and commercialfirst begin by determining the unlevered beta for its commercial component. This is accomplished by comparing Lockheed and Northrop’s average unlevered beta which was .48 . The next step is to derive Boeing’s unlevered beta which was .47 . Fifty four percent of Boeing’s business is commercial; the appropriate beta for this segment
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the germicidal‚ sanitation‚ and antiseptic products unit of Montagne Medical? Business risk – Beta – associated with Sterling’s proposed acquisition is 0.99. The Business risk is obtained from industry average. Unleveraged Beta represents the non-diversifiable risk‚ the risk that affects all firms within the industry. The risk of a company increases with a higher Debt/Equity ratio. Therefore Beta is
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References: Brealey‚ R.A. and S.C. Myers (2000)‚ Principles of Corporate Finance. Sixth edition. McGraw-Hill‚ New York. Campa‚ J.M. and P. Fernández (2004)‚ “Are calculated betas good for anything?”‚ IESE Working Paper. Copeland‚ T. E.‚ T. Koller‚ and J. Murrin (2000)‚ Valuation: Measuring and Managing the Value of Companies. Third edition. New York: Wiley. Damodaran‚ A. (1994)‚ Damodaran on Valuation. New York: John Wiley
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Cox Communications Applied Corporate Finance Contents Executive Summary Background Gannett and other acquisitions: possibilities and constraints of financing Feline PRIDES securities: benefits and costs for Cox Communications Valuation of Gannett’s acquisition Conclusions and recommendations Appendix Executive Summary The main purpose of this report is to evaluate an appropriate financing strategy for Cox Communications
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Select a major industrial or commercial company based in the United States and listed on one of the major stock exchanges in the United States. Each student should select a different company. Avoid selecting an insurance company or a bank‚ because the financial ratios for these financial businesses are different. Write a seven-to-eight-page double-spaced paper answering and demonstrating with calculations and financial data the following questions. 1. What is the name of the company? What is the
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of Revenue 10% of Revenue Market Value of Equity $2‚000.00 $1‚300.00 Outstanding Debt $160.00 $250.00 Both firms are in steady state and are expected to grow 5% a year in the long term. Capital spending is expected to be offset by depreciation. The beta for both firms is 1‚ and both firms are rated BBB‚ with an interest rate on their debt of 8.5%. (The treasury bond rate is 7% and risk premium is 5.5%) As a result of the merger‚ the combined firm is expected to have a cost of goods sold of only 86%
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1) Why is Flagstar in financial distress? When possible‚ back your claims with data. Signs of financial distress • The company lost money almost every year since its leveraged buyout by Coniston Partners in 1989. The income generated was not sufficient to service the interest expenses of the company which stood at $2.62B in 1996. From Exhibit 1‚ we can say that interest coverage ratio computed as EBIT / Interest Expense was 1.31 in 1989 and has been decreasing over years and currently stands at
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Airbus A3XX: Developing the World’s Largest Commercial Jet Introduction: From its inception in 1970‚ Airbus has maintained a reputation for innovative design and technology. Airbus has employed a “fly-by-wire” technology on all of its planes as an efficient alternative to computerized control for mechanical linkages. In addition‚ Airbus streamlined operations and features that have lead to better pilot utilization and lower training costs. These advances help explain why Airbus had received over
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