Question $1$:$$

a$)$ Rendezvous Ltd$.$ expects its EBIT to be $$100,000$ every year forever. The firm can borrow at $11\%.$ Bruce currently has no debt, and its cost of equity is $18\%.$ The tax rate is $31\%.$ Bruce will borrow $$61,000$ and use the proceeds to repurchase shares. What will the WACC be after recapitalization?

b$)$ Provide at least two circumstances, where interest tax$-$shield will have no value for a company.

c$)$ Your firm has a debt$-$equity ratio of $0\mathrm{.}60.$ Your cost of equity is $11\%$ and your after$-$tax cost of debt is $7\%.$ What will your cost of equity be if the target capital structure becomes a $50/50$ mix of debt and equity?

Question $2$:

a$)$ Everystate Inc. is evaluating an extra dividend versus a share repurchase. In either case, $$9,000$ would be spent. Current earnings are $$1\mathrm{.}30$ per share and the stock currently sells for $$64$ per share. There are $1,000$ shares outstanding. In answering the questions that follow, ignore taxes for the first two:

Evaluate the two choices in terms of their effect on the price per share of stock and shareholder wealth

What will be the effect on Everystate$$s EPS and P$/$E ratio under the two different scenarios?

In the real world, which of these choices will you recommend? Why?$$

b$)$ At present, total dividends for each of the next two years are set equal to the cash flow of $$10,000$ per year. There are $100$ shares outstanding, so the dividend per share is $$100.$ The price per share at the moment is $$173\mathrm{.}55$ and the required return of investors is $10\%.$ There is an alternative choice of paying $$11,000$ total dividends in the first year $($$$110$ per share$),$ followed by a liquidating dividend of $$8,900($$$89$ per share$)$ in the second. You prefer the first alternative but the firm$$s management adopts the second alternative. You have $50$ shares to begin with and if you choose to create homemade dividends, how many shares will you have at the end of the first year?

Question $3$

a$)$ Assume that you can buy $250$ Canadian dollars with $100$ British pounds and you have $100$ British pounds. The following exchange rates are available.

Country $|$ U$.$S$.$ $ Equivalent $|$ Currency per U$.$S$.$ $

Canada $|?|1\mathrm{.}3500$

U$.$K $|1\mathrm{.}8305|?$

Complete the table above and compute how much profit, if at all, you can earn with triangle arbitrage?

b$)$ Assume the current spot rate is C$$1\mathrm{.}2103$ and the one$-$year forward rate is C$$1\mathrm{.}1925.$ The nominal risk$-$free rate in Canada is $3\%$ while it is $4$ percent in the U$.$S$.$ At what Canadian interest rate, there will be no possibility for profitable arbitrage?