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Instructions:
BCO315 Corporate Finance is a course in corporate finance. Assignment for the Midterm
Task: Midterm Project
Individual assignment
All of the questions and issues below will be answered by the student.
Formalities:
A document in Excel format should be submitted.
Arial 11 pts font.
Justified text alignment.
Week 4 submission via Moodle (Turnitin). Sunday, June 20th, 23:59 CEST
This task accounts for 40% of your overall grade in this subject.
The following learning outcomes are assessed in this task:
Demonstrate a thorough understanding of the theory and practice of a firm’s financing and capital structure.
Assess the finance risk that the specified debt ratio may entail.
Examine the dividend payout ratio in detail.
Describe and compare the benefits of paying dividends vs keeping earnings in the company.
Explain why stock repurchases are done and how they are done.
QUESTIONS FOR THE ASSIGNMENT:
IMPORTANT: FOR EACH QUESTION, SHOW YOUR DETAILED SOLUTIONS.
Obstacles (60 points)
1.- Macson, Inc. has a 10 million equity market value and a 4.5 million debt market value.
Treasury bills with a one-year maturity yield 4% per year, whereas the market portfolio’s predicted return is 11%. Equity has a beta of 1.2. The company does not pay any taxes. The MM theorem is being followed.
a) What is the debt-to-equity ratio for Macson?
b) What is the weighted average cost of capital for the company?
b) What is the cost of capital for an all-equity firm that is identical?
2.- A 3 million loan is being considered by the Good Company Corporation. The loan includes a 12-percent interest rate and will be repaid in equal installments over the next two years.
The corporation pays a 25% tax rate. What would be the growth in the worth of the company following the loan, according to MM Proposition I with taxes?
3.- Except for their financial structures, companies A and B are similar. Both companies intend to make 100 million in EBIT per year in perpetuity, with all profits going to shareholders as dividends.
Company A perpetual debt with a market value of 90 million and an annual interest rate of 12% has a market worth of 90 million.
Company A has 3 million shares outstanding, each worth 50 at the time of writing.
Company B has no debt and has issued 3 million shares at a market price of 60 each.
Which would you select if you had to buy stocks from A or B, and why?
4.- A firm having the following shareholders equity declares a 20% stock dividend.
Its common stock has a market value of 100 per share and a par value of 2.
1.000.000 in common stock
2.000.000 Euros in capital surplus
10.000.000 in retained earnings
The total equity of the shareholders is 13.000.000 .
a) How many shares will they be issuing?
c) What is the new shareholders equity statement?
5.- Para Atlantic Corporation is debating whether to pay an additional cash dividend or repurchase shares.
The total sum to be paid out is 10000 in any situation.
The current EPS is 5. And the stock is currently trading at 71.
The corporation pays no taxes and has a total of 10,000 common shares outstanding.
What is the worth of a single shareholder who owns one share if they pay a cash dividend?
How much do earnings per share (EPS) and the price-to-earnings ratio (P/E) matter?
What is the worth of a single shareholder who owns one share if you repurchase shares?
How much do earnings per share (EPS) and the price-to-earnings ratio (P/E) matter?
6.- The Super Split Corporation has 1 million outstanding shares of stock that sell for 100 each.
What would the price per share and the new number of shares outstanding be if there were no taxes?
1. A stock split of five-for-two?
2. How about a 30% stock dividend?
3. Is there a three-for-five reverse stock split in the works?
Inquiries (40 points)
a) In terms of capital structure, what is the primary purpose of financial management?
b) What is the meaning of the term “financial leverage” when it refers to the usage of debt financing?
b) Why is it that finance management’s purpose is to maximize the present stock price of the company? In other words, why isn’t maximizing future share price the goal?
d) How is it that dividends are so crucial, while dividend policy is completely irrelevant? Explain.
g) How does a stock repurchase affect a company’s debt ratio?
Rubrics
Descriptor
9-10
The student exhibits a thorough grasp of the ideas.
8-8.9
The student shows that he or she understands the principles.
7-7.9
The student shows that he or she has a good grasp of the ideas.
6-6.9
The pupil shows some comprehension of the topics, but it is insufficient.
3-5.9
The learner exhibits a lack of comprehension of the principles. They may name some pertinent ideas or concepts, but it is evident that the student does not understand the relationship between them.
1-2.9
The student shows a lack of grasp of the concepts by failing to provide any pertinent thoughts or concepts.
0
The student either does not answer the question or cheats.
RUBRIC |
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Excellent Quality 95-100%
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Introduction
45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Literature Support 91-84 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met. |
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Average Score 50-85% |
40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided. |
83-76 points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration. |
52-49 points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met. |
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Poor Quality 0-45% |
37-1 points The background and/or significance are missing. No search history information is provided. |
75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration. |
48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met |
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Midterm Assignment for BCO315 Corporate Finance