(5 points) Assume the following information for firm Omega: Bonds = 30 million with

yield to maturity = 8%; Stocks = 100 million; covariance of the stock returns with the

market = 0.048; standard deviation of the market = 0.20; market risk premium = 0.075;

risk free return = 0.06; corporate tax rate = 0.28. Omega plans to buy a new machine

that costs 40 million. The machine will lead to annual cash flows of 6 million per year

for 20 years. The purchase of machine will not change the risk level of the firm. Should

Omega buy the machine? Show your answer!

4. Company Delta has 250 shares outstanding. Its assets consists of cash = 500 and fixed

assets of 2,000. Answer the following questions:

(i) (2 points) Sigma has declared a dividend of 0.80 per share. The stock goes exdividend

tomorrow. What is the price of stock today and tomorrow? (Assume no

taxes)

(ii) (2 points) Sigma has declared instead a 12% stock dividend. The stock goes exdividend

tomorrow. What is the price of stock today and tomorrow? (Assume no

taxes)

(iii) (2 points) Instead of paying a cash dividend, Sigma has announced that it is going to

repurchase 200 of stock. What is the effect of this repurchase? Ignoring taxes,

show how this repurchase is effectively the same as a 0.80 dividend per share.