Dinklage Corp. has 10.1 million shares of common stock outstanding. The current share price is $58, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, has a 7 percent coupon, and sells for 91 percent of par. The second issue has a face value of $64.64 million, has a 7 percent coupon, and sells for 94.1 percent of par. The first issue matures in 10 years, the second in 7 years.

a. What is the company's capital structure weight of equity on a book value basis?

b. What is the company's capital structure weight of debt on a book value basis?

c. What is the company's capital structure weight of equity on a market value basis?

d. What is the company's capital structure weight of debt on a market value basis?

Dividends

Name five factors that influence a company's dividend policy. Discuss the basis

of each of these.

In 2017, Congress enacted a bill that 1) reduced the corporate tax rate from 35% to 21% and 2) allowed the immediate write-off of capital spending. 3) disallowed the expensing of interest paid on debt. Discuss at a high level, how each of these changes will likely affect your valuations. (e.g. stock price, P/E ratio, ROR, WACC).

You want to be able to withdraw $45,000 from your account each year for 15 years after you retire. If you expect to retire in 25 years and your account earns 6.8% interest while saving for retirement and 6.5% interest while retired:
Round your answers to the nearest cent as needed.

a) How much will you need to have when you retire?
$

b) How much will you need to deposit each month until retirement to achieve your retirement goals?
$

c) How much did you deposit into you retirement account?
$

d) How much did you receive in payments during retirement?
$

e) How much of the money you received was interest?
$

Janice is considering an investment costing $65,500 with cash flows of $48,700 in Year 2, $36,500 in Year 3, and $19,900 in Year 4. The discount rate is 11 percent, and the required discounted payback period is 3 years. Should this project be accepted or rejected? What is the discounted payback period?

Multiple Choice

• Rejected 2.82 years

• Accepted; 1.97 years

• Accepted; 2.38 years

• Rejected; 3.77 years

• Accepted; 2.97 years

Fleming, a publicly held company, and several officers of the company, were sued by various stockholders for securities fraud for filing documents that were materially misleading. The stockholders contended that information failed to discuss litigation lost by Fleming that resulted in a damage award of $200 million, which led to the company's stock falling by about 25%. The stock pricer recovered some after part of the trial verdict was set aside, and Fleming settled the case by paying $20 million. Stockholders contended that failure to fully reveal the risks of that litigation caused losses to investors in Fleming stock. The district court dismissed the suit because the plaintiffs failed to show that Fleming made deliberate and materially misleading statements of omissions. Stockholders appealed. [City of Philadelphia v. Fleming Co., 264 F.3d 1245, 10th Cir. (2001)]

What evidence is required in order to show that the defendant "deliberately" made misleading statements or omissions to potential stockholders.

Explain the rationale behind the idea that equity is a call option on a firm's assets. In other words, explain why equity ownership of a firm is equivalent to owning a call option on the firm’s assets. Next, explain what it would mean for shareholders to allow this call option to expire, and under what circumstances shareholders would do so.

Defensive tactics such as poison pills and supermajority clauses are designed to resist unfriendly takeovers. Briefly describe how share rights plans work and why they might discourage takeover attempts. Do such tactics work to the advantage of all shareholders all of the time? Discuss.

Suppose that a manufacturer has an ongoing need for silver as a raw material in the production process, and is concerned about the risk of the price of silver going up. The firm is considering two hedging choices: futures contracts and option contracts.

(i) Suppose that the firm decides to hedge using futures contracts. Should it buy or sell futures contracts? Explain.

(ii) Suppose that the firm decides to hedge using option contracts. Should it use call or put options? Should it buy or sell these options? Explain.

Lastly, briefly discuss the advantages and disadvantages of hedging using options as compared to futures contracts.

I asked them to conduct a cash flow analysis to make sure that the proposed t-shirt venture generate value. The students, after careful data collection and analysis, have come up with the following assumptions for T-shirt Corp.:

Assumptions:

1. The life of the project is expected to be 5 years.  Please assume that the analysis is taking place at the end of 2018. 2019 will be the first year of operation.
2. The projected sales are:

3. The price of a t-shirt will be $25 in 2019 and will increase by 3% per year in the following years.
4. The cost of procuring one t-shirt will be $4 in 2019 and will increase by 2% per year afterwards.
5. The cost of printing a design will be $2 per t-shirt.
6. There will be marketing expenses amounting to $1,000 per year.
7. T-shirt Corp. needs to invest in a machine that would print designs on the t-shirts.  The machine costs $3,000 and will be depreciated fully using a straight line method over 5 years. At the end of 2021, the machine will be recycled at no cost.
8. The company will run the operations in a garage owned by one of the parents.  The rent and utilities allocated to the garage is $200 per month.  This amount would be paid regardless of how the garage is utilized.
9. The company will finance the machine with a bank loan.  Interest expenses will be $300 per year.
10. In order to run the t-shirt venture, the T-shirt Corp. will need to invest 10% of the following year’s sales in inventory.  The venture will also need to have 15% of following year’s sales in accounts payable and 20% of following year’s sales in accounts receivable.
11. T-shirt Corp. already spent $5,000 for market research in 2018.
12. Tax rate (federal plus state) is 30%.
13. The cost of capital for this project is estimated to be 10%.

Please analyze this project and provide advice to T-shirt Corp.  Should they start the t-shirt venture?

a) Briefly explain the concept of market efficiency.

b) The textbook describes the field of Behavioral Finance as the study of “how reasoning errors influence financial decisions.” The textbook also contains a good discussion of how cognitive errors, biases and heuristics lead to irrational decisions by investors. What implications does all this have for stock market efficiency? Discuss.

What are the ultimate principles in the principal-agent framework?

You are trying to evaluate the effects of issuing 300 million of new debt and using the proceeds either to pay a dividend or to repurchase shares for Star Inc. Star Inc. currently has 232.44 million shares outstanding and is trading at $56.37 per share. Its current book value of equity is 127.6 million and EBIT is 527 million. Tax rate is 40%. Cost of debt for the new debt is 13%.

a.) Star's book value and market value of equity after debt issuance.

b.) What will be the number of shares outstanding and the new share prices? please show for both the dividend and repurchase scenario.

c.) What will happen to the earnings per share. Please show for both the dividend and repurchase scenario.

What are the advantages and disadvantages of futures compared to forwards?