Chapter 10

1.

This year, FCF, Inc., has earnings before interest and taxes of $10 million, depreciation expenses of $1 million, capital expenditures of $1.5 million, and has increased its net working capital by $500,000. If its tax rate is 35%, what is its free cash flow?

2.chas $500 million in debt and 20 million shares of equity outstanding. Its excess cash reserves are $15 million. They are expected to generate $200 million in free cash flows next year with a growth rate of 2% per year in perpetuity. River Enterprises’ cost of equity capital is 12%. After analyzing the company, you believe that the growth rate should be 3% instead of 2%. How much higher (in dollars) would the price per share of stock be if you are right?

Chapter 15

1.You are finalizing a bank loan for $200,000 for your small business and the closing fees payable to the bank are 2% of the loan. After paying the fees, what will be the net amount of funds from the loan available to your business?

9.Your  firm successfully issued new debt last year, but the debt carries  covenants. Specifically, you can only pay dividends out of earnings made  after the debt issue and you must maintain a minimum quick (acid-test)  ratio 

((current assets?inventory)/current liabilities) 

of 1:1. Your net income this year was $70 million. Your cash is $10  million, your receivables are $8 million, and your inventory is $5  million. You have current liabilities of $19 million. What is the  maximum dividend you could pay this year and still comply with your  covenants?

13. You own a bond with a face value of $10,000 and a conversion ratio of 450. What is the conversion price?

Chapter 16

5. 

Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage.

a.   Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 6%. What will be the expected return of equity after this transaction?

b.  Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon’s debt will be much riskier. As a result, the debt cost of capital will be 8%. What will be the expected return of equity in this case?

  c. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument?

6 Suppose Microsoft has no debt and a WACC of 9.2%. The average debt-to-value ratio for the software industry is 5%. What would be its cost of equity if it took on the average amount of debt for its industry at a cost of debt of 6%?

7 Your firm is financed 100% with equity and has a cost of equity capital of 12%. You are considering your first debt issue, which would change your capital structure to 30% debt and 70% equity. If your cost of debt is 7%, what will be your new cost of equity?