Question
In: Finance
Consider a simple firm that has the following market-value balance sheet: Assets Liabilities end equity $...
Consider a simple firm that has the following market-value balance sheet: Assets Liabilities end equity $ 1 020 Debt $ 430 Equity 590 Next year, there are two possible values for its assets, each equally likely: $ 1 200 and $ 970. Its debt will be due with 4.8 % interest. Because all of the cash flows from the assets must go to either the debt or the equity, if you hold a portfolio of the debt and equity in the same proportions as the firm's capital structure, your portfolio should earn exactly the expected return on the firm's assets. Show that a portfolio invested 42 % in the firm's debt and 58 % in its equity will have the same expected return as the assets of the firm. That is, show that the firm's pre-tax WACC is the same as the expected return on its assets.
Solutions
jeff jeffy answered 8 months agoRelated Solutions
A financial institution has the following market value balance sheet structure: Assets Liabilities and Equity Cash...
A financial institution has the following market value balance
sheet structure:
Assets
Liabilities and Equity
Cash
$
1,400
Certificate of deposit
$
10,400
Bond
10,400
Equity
1,400
Total assets
$
11,800
Total liabilities and equity
$
11,800
a. The bond has a 10-year maturity, a fixed-rate
coupon of 10 percent paid at the end of each year, and a par value
of $10,400. The certificate of deposit has a 1-year maturity and a
6 percent fixed rate of interest. The...
A financial institution has the following market value balance sheet structure: Assets Liabilities and Equity Cash...
A financial institution has the following market value balance
sheet structure:
Assets
Liabilities and Equity
Cash
$
2,400
Certificate of deposit
$
11,400
Bond
10,200
Equity
1,200
Total assets
$
12,600
Total liabilities and equity
$
12,600
a. The bond has a 10-year maturity, a fixed-rate
coupon of 12 percent paid at the end of each year, and a par value
of $10,200. The certificate of deposit has a 1-year maturity and a
6 percent fixed rate of interest. The...
A firm has the following balance sheet: Assets Liabilities and Equity Cash $ 5,000 Accounts payable...
A firm has the following balance sheet:
Assets
Liabilities and Equity
Cash
$
5,000
Accounts payable
$
5,000
Accounts receivable
153,000
Long-term debt
109,000
Inventory
89,000
Common stock ($8 par;
32,000
4,000 shares outstanding)
Plant and equipment
190,000
Additional paid-in capital
148,000
Retained earnings
143,000
$437,000
$437,000
Construct a new balance sheet showing the impact of a
four-for-one split. If the current market price of the stock is
$55, what is the price after the split? Round the par value...
A firm has the following balance sheet: Assets Liabilities and Equity Cash $ 5,000 Accounts payable...
A firm has the following balance sheet:
Assets
Liabilities and Equity
Cash
$
5,000
Accounts payable
$
5,000
Accounts receivable
158,000
Long-term debt
111,000
Inventory
72,500
Common stock ($9 par;
31,500
3,500 shares outstanding)
Plant and equipment
210,000
Additional paid-in capital
150,000
Retained earnings
148,000
$445,500
$445,500
A. Construct a new balance sheet showing the impact of a
three-for-one split. If the current market price of the stock is
$56, what is the price after the split? Round the par...
State Bank has the following year-end balance sheet (in millions): Assets Liabilities and equity Cash $ ...
State Bank has the following year-end balance sheet (in
millions):
Assets
Liabilities and equity
Cash
$
10
Deposits
$
90
Loans
$
90
Equity
$
10
Total assets
$ 100
Total liabilities and
equity
$ 100
The loans primarily are fixed-rate, medium-term loans, while the
deposits are either short-term or variable-rate deposits. Rising
interest rates have caused the failure of a key industrial company,
and as a result, 3 percent of the loans are considered
uncollectable and thus have no...
Hewlard Pocket’s market value balance sheet is given. Assets Liabilities and Shareholders’ Equity A. Original balance...
Hewlard Pocket’s market value balance sheet is given.
Assets
Liabilities and Shareholders’
Equity
A. Original balance sheet
Cash
$
150,000
Debt
$
0
Other assets
950,000
Equity
1,100,000
Value of firm
$
1,100,000
Value of firm
$
1,100,000
Shares outstanding = 100,000
Price per share = $1,100,000 / 100,000 = $11
Pocket needs to hold on to $52,000 of cash for a future
investment. Nevertheless, it decides to pay a cash dividend of
$2.10 per share and to replace cash...
Hewlard Pocket’s market value balance sheet is given. Assets Liabilities and Shareholders’ Equity A. Original balance...
Hewlard Pocket’s market value balance sheet is given.
Assets
Liabilities and Shareholders’
Equity
A. Original balance sheet
Cash
$
150,000
Debt
$
0
Other assets
950,000
Equity
1,100,000
Value of firm
$
1,100,000
Value of firm
$
1,100,000
Shares outstanding = 100,000
Price per share = $1,100,000 / 100,000 = $11
Pocket needs to hold on to $84,000 of cash for a future
investment. Nevertheless, it decides to pay a cash dividend of
$2.30 per share and to replace cash...
1) With respect to a balance sheet with categories Assets, Liabilities, and Equity, construct a simple...
1) With respect to a balance sheet with categories Assets,
Liabilities, and Equity, construct a simple mathematical equation
that links the three. How is the Income Statement different from
the Statement of Cash Flows? How does accrual accounting partially
explain this? Which one is the most important to discerning the
company’s true operating story and then forecasting its future
prospects?
Problem 10-08 A firm has the following balance sheet: Assets Liabilities and Equity Cash $ 20,000...
Problem 10-08
A firm has the following balance sheet:
Assets
Liabilities and
Equity
Cash
$
20,000
Accounts payable
$
20,000
Accounts receivable
152,000
Long-term debt
111,000
Inventory
92,000
Common stock ($6 par;
24,000
4,000 shares outstanding)
Plant and equipment
190,000
Additional paid-in capital
157,000
Retained earnings
142,000
$454,000
$454,000
a) Construct a new balance sheet showing the impact of a
three-for-one split. If the current market price of the stock is
$50, what is the price after the split? Round...
Problem 10-08 A firm has the following balance sheet: Assets Liabilities and Equity Cash $ 25,000...
Problem 10-08
A firm has the following balance sheet:
Assets
Liabilities and Equity
Cash
$
25,000
Accounts payable
$
25,000
Accounts receivable
156,000
Long-term debt
103,000
Inventory
79,000
Common stock ($7 par;
21,000
3,000 shares outstanding)
Plant and equipment
190,000
Additional paid-in capital
155,000
Retained earnings
146,000
$450,000
$450,000
Construct a new balance sheet showing the impact of a
two-for-one split. If the current market price of the stock is $50,
what is the price after the split? Round the...
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