Exercise 2 (Exam Spring 2020) Entertain You Inc. is an American company that operates in two...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Exercise 2 (Exam Spring 2020) Entertain You Inc. is an American company that operates in two businesses, Entertainment and Cable TV. The company gets approximately 30% of its revenues from the latter. In this industry, the average beta value is 1,11 and the average debt to equity ratio is 60,17%. The average beta value in the entertainment business is 1,33 with an average debt to equity ratio of 20,07% Entertain You Inc. has 500 000 shares outstanding, trading at 22,10 dollars. It has 4 513 000 dollars in debt (market value). The US treasury bond rate is 2%. Entertain You Inc. has an operating income of $40 000 and 80 000 in interest expenses. Use a tax rate of 34% in all cases. At the moment, the S&P 500 is at 3 400, paying 5% in dividends. The expected long-term growth in dividends is expected to be 1,8% a) What is the firm's D/E-ratio? b) Estimate the implied equity risk premium in the market. c) Estimate the unlevered betas in the entertainment industry and the Cable TV industry. d) Estimate Entertain You Inc.'s bottom-up beta. e) Estimate the firm's cost of equity. We have the following relationships between the interest coverage ratio, the bond rating and default spread: Synthetic rating If interest coverage ratio is More than Up to Rating is 0,199999 D2/D 0,649999 C2/C 0,79999 Ca2/CC 1,249999 Caa/CCC 1,499999 B3/B- 1,749999 82/B 1,999999 B1/B+ 2,2499999 Ba2/BB 2,49999 Bal/BB+ 2,999999 Baa2/BBB 4,249999 A3/A- 5,499999 A2/A 6,499999 A1/A+ 8,499999 Aa2/AA 100000 Aaa/AAA -100000 0,2 0,65 0,8 1,25 1,5 1,75 2 2,25 2,5 3 4,25 5,5 6,5 8,50 f) Estimate Entertain You Inc.'s cost of debt. g) What is the firm's cost of capital? Spread is 15,12 % 11,34 % 8,64 % 8,20 % 5,15% 4,21 % 3,51 % 2,40 % 2,00 % 1,56% 1,22 % 1,08 % 0,98 % 0,78 % 0,63 % Exercise 2 (Exam Spring 2020) Entertain You Inc. is an American company that operates in two businesses, Entertainment and Cable TV. The company gets approximately 30% of its revenues from the latter. In this industry, the average beta value is 1,11 and the average debt to equity ratio is 60,17%. The average beta value in the entertainment business is 1,33 with an average debt to equity ratio of 20,07% Entertain You Inc. has 500 000 shares outstanding, trading at 22,10 dollars. It has 4 513 000 dollars in debt (market value). The US treasury bond rate is 2%. Entertain You Inc. has an operating income of $40 000 and 80 000 in interest expenses. Use a tax rate of 34% in all cases. At the moment, the S&P 500 is at 3 400, paying 5% in dividends. The expected long-term growth in dividends is expected to be 1,8% a) What is the firm's D/E-ratio? b) Estimate the implied equity risk premium in the market. c) Estimate the unlevered betas in the entertainment industry and the Cable TV industry. d) Estimate Entertain You Inc.'s bottom-up beta. e) Estimate the firm's cost of equity. We have the following relationships between the interest coverage ratio, the bond rating and default spread: Synthetic rating If interest coverage ratio is More than Up to Rating is 0,199999 D2/D 0,649999 C2/C 0,79999 Ca2/CC 1,249999 Caa/CCC 1,499999 B3/B- 1,749999 82/B 1,999999 B1/B+ 2,2499999 Ba2/BB 2,49999 Bal/BB+ 2,999999 Baa2/BBB 4,249999 A3/A- 5,499999 A2/A 6,499999 A1/A+ 8,499999 Aa2/AA 100000 Aaa/AAA -100000 0,2 0,65 0,8 1,25 1,5 1,75 2 2,25 2,5 3 4,25 5,5 6,5 8,50 f) Estimate Entertain You Inc.'s cost of debt. g) What is the firm's cost of capital? Spread is 15,12 % 11,34 % 8,64 % 8,20 % 5,15% 4,21 % 3,51 % 2,40 % 2,00 % 1,56% 1,22 % 1,08 % 0,98 % 0,78 % 0,63 %
Expert Answer:
Answer rating: 100% (QA)
ANSWER a The firms DE ratio is 6017 b The implied equity risk premi... View the full answer
Related Book For
Financial Reporting Financial Statement Analysis and Valuation
ISBN: 978-0324302950
6th edition
Authors: Clyde P. Stickney
Posted Date:
Students also viewed these finance questions
-
A firm has a debt to equity ratio of 40%, debt of $250,000, and net income of $100,000. The return on equity is?
-
A company has 1,000,000 shares outstanding trading at $15 apiece. Managers believe that the discount rate appropriate for the risk borne is 15% and total cash flows, expected to be $1 million next...
-
The XYZ Corporation is an American company that manufactures the parts needed for its products abroad in country M. It assembles them in the U.S. The transfer price is $500 and the exchange rate is 2...
-
Remove left recursion in the following grammar. Show each step. Hint: First remove direct left recursion. Then the indirect left recursion. A AB | Aab | BA| a Bb | | b
-
You want profile information on the president of a company. Which reference book should be consulted?
-
Divide participants according to median log 10 CO (adjusted), and estimate survival curves for each subgroup?
-
Why parties may wish to arbitrate a claim?
-
Marston Corporation manufactures pharmaceutical products that are sold through a network of sales agents. The agents are paid a commission of 18% of sales. The income statement for the year ending...
-
This is the customer satisfaction survey over a 10-week period. USA Pizza sells 100 pizza per day. Based on the data, construct the C-chart for USA Pizza. (Do the rounding to the 2nd place after the...
-
Compute the hydraulic radius for the channel shown in Fig. 14.20 if the water depth is 0.50 m. 25 m 0.6 m 0.5 m 1.0 m 2.
-
Select one (1) project from the working or educational environment of your choice and specify the main work process (e.g., suppliers and customers involved, work flow, etc.) of the project that you...
-
What are Wiener-Khintchine formulas?
-
Fill in the Blank. The use of close tolerances and better surface finish for machine parts tends to make a machine ____________ susceptible to vibration.
-
The simplest form of mass matrix is known as a. lumped-mass matrix b. consistent-mass matrix c. global mass matrix
-
Fill in the Blank. When the speed of rotation of a shaft equals one of the natural frequencies of the shaft, it is called ____________ speed.
-
What is the role of transformation matrices in the finite element method?
-
Using the article attached, what are some questions you may come across regarding the information given? ORGANIZATIONS. NEW YORK PRE FINKLER, STEVEN A. 2010. FINANCIAL MANAGEMENT FOR PUBLIC & NON...
-
In the current year, the City of Omaha donates land worth $500,000 to Ace Corporation to induce it to locate in Omaha and create an estimated 2,000 jobs for its citizens. a. How much income, if any,...
-
Exhibit 4.18 presents selected operating data for three retailers for a recent year. Albertsons sells grocery products. Home Depot sells a wide range of home improvement products, which includes...
-
Define financial leverage. Explain why financial leverage works to the benefit of the common shareholders whenever the ROCE exceeds the ROA.
-
Hewlett-Packard (HP) and Sun Microsystems (Sun) derive similar proportions of their sales from the United States, Europe, Japan, and other countries. Recent annual reports of the two companies...
-
The following events occurred during the first month of business of Hair Affair Pty Ltd, Kate Browns hairdressing salon: 1. issued shares to shareholders in exchange for \($20\) 000 cash 2. purchased...
-
How does journalising differ from posting?
-
On 5 January, the day of her successful grand opening of Hair Affair Pty Ltd, Kate Brown collected \($2280\) in cash for hair styling services, and paid \($400\) in wages and \($92\) for rent. Kate...
Study smarter with the SolutionInn App