In a Modigliani-Miller world, Publicvehicle Inc. is an automobile company that is completely equity financed. The...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
In a Modigliani-Miller world, Publicvehicle Inc. is an automobile company that is completely equity financed. The company value next year will be €75m (p=0.2), €90m (p=0.5) or €100m (p=0.3). [Note that the "company value next year" means the same as the "cash flows if the firm was liquidated at the end of the year"]. Publicvehicle Inc.'s unlevered beta value is 1.5, the expected return of the market portfolio is 10% and the risk free rate is 5%. 1. Calculate Publicvehicle Inc.'s market value today. First calculate the market value next year, then the appropriate discount rate and then the firm value. (10 points) 2. Suppose now that Publicvehicle Inc. is not purely equity-financed but has risk- free debt of €30m face value due next year. Tip: Determine the following figures step by step: Determine the D/E Ratio in t=1. Determine the debt value in t-0. Determine the equity value in t=0. Determine the D/E ratio in t=0. Determine the return on equity (cost of equity). Determine the WACC In a Modigliani-Miller world, Publicvehicle Inc. is an automobile company that is completely equity financed. The company value next year will be €75m (p=0.2), €90m (p=0.5) or €100m (p=0.3). [Note that the "company value next year" means the same as the "cash flows if the firm was liquidated at the end of the year"]. Publicvehicle Inc.'s unlevered beta value is 1.5, the expected return of the market portfolio is 10% and the risk free rate is 5%. 1. Calculate Publicvehicle Inc.'s market value today. First calculate the market value next year, then the appropriate discount rate and then the firm value. (10 points) 2. Suppose now that Publicvehicle Inc. is not purely equity-financed but has risk- free debt of €30m face value due next year. Tip: Determine the following figures step by step: Determine the D/E Ratio in t=1. Determine the debt value in t-0. Determine the equity value in t=0. Determine the D/E ratio in t=0. Determine the return on equity (cost of equity). Determine the WACC
Expert Answer:
Answer rating: 100% (QA)
1 Calculating Publicvehicle Incs market value today when it is purely equity financed Market value n... View the full answer
Related Book For
Statistics And Data Analysis For Financial Engineering
ISBN: 9781461427490
1st Edition
Authors: David Ruppert
Posted Date:
Students also viewed these accounting questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Financial statements for the ACTACTSTAT Company are given below: During 2021 the firm declared and paid cash dividends of P85,000. There were 50,000 shares of common stock outstanding throughout the...
-
Susan Young, a part-time inventor, met Henry Jones, a Christmas ornament manufacturer, while golfing. Henry manufactures an ornament everyone loves, but stores will not carry because they are very...
-
Ryans demand for hamburgers (a private good) is Q = 21 6P and Madisons demand is Q = 6 3P. a. Write down an equation for the social marginal benefit of hamburger consumption. b. Now suppose that...
-
Compare the rise velocity of an \(\frac{1}{8}\)-in.-diameter air bubble in water to the fall velocity of an \(\frac{1}{8}\)-in.-diameter water drop in air. Assume each to behave as a solid sphere.
-
Selected account balances for R. Tam Company at January 1, 2012, are presented below. Accounts Payable $14,000 Accounts Receivable 22,000 Cash 17,000 Inventory 13,500 R. Tams sales journal for...
-
2. How many bits are required to address a 2K x 8 main memory if a) Main memory is byte-addressable? b) Main memory is word-addressable?
-
What type of web server is sending packet/frame 280 of the capture? 2. What type of HTTP Status Code is the web server in packet/frame 314 sending? Google the error and provide a quote summarizing...
-
Your friend wants to move out of her dangerous Chicago neighborhood. But she is afraid that is she relocates to an economically divers section of the city, her daughter will be classified as "the...
-
1) What is class? 2)What is the difference between default class and public class? 3)What is final class? Q)What is abstract class ? 3) What is object ? Q)Object class Q)toString() Q)Data Hiding...
-
Show the manual calculation to find V LOAD using nodal analysis, mesh analysis, superposition, source transformation, and Thevenin or Norton theorem by using the value from group no. 3 on Table 2. ...
-
Explain the following two (2) methods for conducting a cost-benefit analysis for high priority change requirements and opportunities in 50-100 words each: Return-on-investment analysis Net present...
-
Businesses have different strategies for when a country is in a recession or an upswing. Do some research within the company or in general and evaluate what your company would do when the business...
-
Karen, Tara and Chelsea buy ice cream and paperback novels to enjoy on hot summer days. Ice cream is $5 a gallon and paperback novels are $8 each. Karen has a budget of $80, Tara has a budget of $60,...
-
A stock is expected to pay dividends of $2.00 and $2.20 in the next two years and sell for a price of $45 at the end of two years. What will an investor who expects a 10 percent rate of return be...
-
State whether each statement is true or false. If false, give a reason. {purple, green, yellow} = {green, pink, yellow}
-
Use model (16.19) to estimate the expected excess return for all seven stocks. Compare these results to using the sample means of the excess returns to estimate these parameters. Assume for the...
-
Consider the AR(1) model Yt = 5 - 0.55Yt-1 + t and assume that = 1.2. (a) Is this process stationary? Why or why not? (b) What is the mean of this process? (c) What is the variance of this process?...
-
What is the probability that the hedge fund will need to liquidate for a loss?
-
Which of the following is true? a. Financial frauds have not occurred in U.S. companies because GAAP has detailed accounting and disclosure requirements. b. Transaction analysis is basically the same...
-
Describe the five financial statements and how they are prepared.
-
Presented below in alphabetical order are statement of financial position items for Feagler Gardening at December 31, 2025. Prepare a statement of financial position following the format of...
Study smarter with the SolutionInn App