Answer:
The levered beta for the company is 1.93.
Explanation:
Levered beta for the company = (Weight of steel business*levered beta of steel business) + (Weight of financial services business*levered beta of financial services business)
Levered beta of steel business = Unlevered beta of steel sector*[1+(1 - firm's tax rate)*(firm's debt/equity ratio)
levered beta of financial services business = Unlevered beta of financial services sector*[1+(1 - firm's tax rate)*(firm's debt/equity ratio)
Unlevered beta of steel sector = Current beta of steel sector/[1+(1 - avg. tax rate of firms in the sector)*(Avg. debt/equity ratio of the sector)
Unlevered beta of steel sector = 1.18/[1+((1-0.4)*0.3)]
Unlevered beta of steel sector = 1.18/[1+(0.6*0.3)]
Unlevered beta of steel sector = 1.18/(1+0.18)
Unlevered beta of steel sector = 1.18/1.18
Unlevered beta of steel sector = 1
Levered beta of steel business = 1*[1+((1-0.3)*1.5)]
Levered beta of steel business = 1*[1+(0.7*1.5)]
Levered beta of steel business = 1*(1+1.05)
Levered beta of steel business = 1*2.05
Levered beta of steel business = 2.05
Unlevered beta of financial services sector = Current beta of financial services sector/[1+(1 - avg. tax rate of firms in the sector)*(Avg. debt/equity ratio of the sector)
Unlevered beta of financial services sector = 1.14/[1+((1-0.4)*0.7)]
Unlevered beta of financial services sector =1.14/[1+(0.6*0.7)]
Unlevered beta of financial services sector = 1.14/(1+0.42)
Unlevered beta of financial services sector = 1.14/1.42
Unlevered beta of financial services sector = 0.80
Levered beta of financial services business = 0.8*[1+((1-0.3)*1.5)] = 0.8*[1+(0.7*1.5)] = 0.8*(1+1.05) = 0.8*2.05 = 1.64
Levered beta for the company = (0.7*2.05) + (0.3*1.64)
Levered beta for the company = 1.44 + 0.49
Levered beta for the company = 1.93
Hence, the levered beta for the company is 1.93.
To estimate the levered beta for a company with operations in multiple sectors - steel and financial services in this case - you take a weighted average of the sector betas based on earnings distribution to get the unlevered beta. You then adjust for the company's debt/equity ratio and tax rate to get the levered beta. The estimated levered beta for this company is 2.378.
To estimate the levered beta for the company, we first need to consider the betas for each of the sectors the company operates in - steel and financial services. Given the firm's earnings distribution, the unlevered beta is computed as 0.7*Steel Beta + 0.3*Financial Services Beta = 0.7*1.18 + 0.3*1.14 = 1.16.
Next, to calculate the levered beta, we need to factor in the firm's debt/equity ratio. We use the formula for the levered beta: Levered Beta = Unlevered Beta * (1 + (1 - Tax Rate) * D/E ratio). Substituting the values we have: Levered Beta = 1.16 * (1 + (1 - 0.3) * 1.5) = 1.16 * 2.05 = 2.378. Therefore, the estimated levered beta is 2.378.
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b. How large a gain or loss in aggregate dollar terms do market signaling studies suggest existing FARO shareholders will experience on the announcement date?
c. What percentage of the value of FARO’s existing equity prior to the announcement is this expected gain or loss?
d. At what price should FARO expect its existing shares to sell immediately after the announcement?
Answer:
a. Market signaling studies suggest that the price of existing FARO shares will fall.
b. $60,000,000
c. 8.403%
d. $38.471
Explanation:
Given
New Shares: $200,000,000
Existing Shares: $17,000,000
Price per Share: 42
a.
Because the stock of the FARO Technologies is overvalued at the current price
b.
Expected Loss: 30% * New Shares Size
New Shares Size = $200,000,000 (given)
Expected Loss = 30% * $200,000,000
Expected Loss = $60,000,000
c.
Percentage of the value of FARO’s existing equity = Ratio of New Expected Share Value to Existing Share Value
Expected Share Value = $60,000,000
Existing Share Value = Price per Shares * Existing Shares
Existing Share Value = 42 * $17,000,000
Existing Share Value = $714,000,000
Percentage of FARO's Existing Equity = $60,000,000 ÷ $714,000,000
Percentage = 8.403%
d.
The price FARO should expect its existing shares to sell
= Price per Share (1 - Percentage of Existing Equity)
Price per Share = 42
Percentage Existing Equity = 8.403%
The price FARO should expect its existing shares to sell = 42(1-8.403%)
The price FARO should expect its existing shares to sell = 42(1-0.08403)
The price FARO should expect its existing shares to sell = 42 * 0.91597
The price FARO should expect its existing shares to sell = $38.47074
The price FARO should expect its existing shares to sell = $38.471 ----- Approximated
The announcement of FARO technologies to sell new shares might decrease their share price as it might signal overvaluation to investors. Existing shareholders may thus experience a loss. The new selling price would be the original price minus the decrease caused by the announcement.
a. The market signaling theory suggests that the announcement of FARO Technologies selling new shares to raise capital could lead to a decrease in the company's share price. This is because it signals to investors that the company may be overvalued, leading them to sell their shares, thereby driving down the price.
b. For existing FARO shareholders, the aggregate dollar loss could be estimated by multiplying the decrease in share price by the number of existing shares.
c. To calculate the percentage of the value of FARO's existing equity that this represents, we could divide the total dollar loss by the company's market capitalization before the announcement, and then multiply by 100 to get a percentage.
d. After the announcement, the price that FARO should expect its shares to sell at would be the original price minus the decrease due to the announcement.
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Answer:
I would issue stock because it is cheaper than borrowing.
Explanation:
First of all, issuing stock does not represent the obligation to pay interest over a long period of time, which can become very expensive if market conditions become adverse. Besides, if the company is small, it probably does not have the most advantageous financial conditions according to the banks, and the interest rate could be relatively high.
Besides, borrowing would mean increasing the liabilities in the financial statements, which could make the company less attractive for future investors.
Issuing stock does have the disadvantage of dilluting control of the company, because now stockholders own a piece of the company and could demand changes in management, and a different company strategy.
Answer:
False
Explanation:
Since the maturity amount is $40,000 and the interest rate is 7%
So, the receipt of the semiannual interest payment would be
= Maturity amount × interest rate
= $40,000 × 7% ÷ 2
= $1,400
Since the interest payment is semi-annual so we divide the interest rate by 2 and if the time period is given so we double it.
Hence, the given statement is false
Answer:
Dr Cash for $461,795,
Cr Premium on Bonds Payable for $11,795
Cr Bonds Payable for $450,000
Explanation:
Journal entries
Dr Cash for $461,795,
Cr Premium on Bonds Payable for $11,795
Cr Bonds Payable for $450,000
(Issue price of $461,795 - par value of $450,000) =$11,795
Answer:
Dr Cash $461,795
Cr Bonds payable $450,000
Cr Premium on bonds payable $11,795
Explanation:
The journal entries to record the issue of bonds for the proceeds of $461.795 is to debit the cash amount as the cash has increased and credit would $450,000 in bonds payable account and the balance of $11,795($461,795-$450,000) is the premium on the issue and it is credited to premium on bonds account.
The bonds payable is credited because the $450,000 represents obligation owed to bondholders
Ken is determined not to have employees work on Sunday, but he would like to know the opportunity cost of not working on Saturday. Provide Ken with an estimate of the opportunity cost, and explain why you do not have to consider rent or depreciation of office equipment in your estimate.
Answer:
Parrish Plumbing
1. Opportunity cost of not working on Saturday:
= $52,000 per year.
2. Parrish's monthly rent or depreciation related to office equipment are not considered because they are not incremental costs. Non-incremental costs do not make any difference to the decision to work on Saturday or not. Therefore, the costs are regarded as sunk, because they must be incurred no matter the decision. They are therefore irrelevant and non-variable in nature.
Explanation:
Daily revenue = $2,500
less relevant or incremental expenses:
Labor $700
Parts 500
Transport 100
Office staff 200 (1,500)
Incremental profit $1,000 per week
Annual incremental profit = $52,000 (52 * $1,000) or opportunity cost
The opportunity cost of not working on Saturday for Parrish Plumbing is $52,000, which is the foregone profit. This is calculated by subtracting operation costs from potential revenue. Sunk costs like rent or depreciation are not considered as they don’t affect incremental costs.
To calculate the opportunity cost of not working on Saturday for Parrish Plumbing, we need to subtract the total costs associated with working on Saturday from the total revenue that could be generated if work was done on that day. Ken is projecting a daily revenue of $2500 for each Saturday they would be opened for 52 Saturdays in a year, giving a total annual revenue of $130,000 ($2500 * 52).
The costs for staying open on Saturday include $700 for labor, $500 for parts, $100 for transportation, and $200 for office staff which totals to $1500. Therefore, the net profit for working on a Saturday would be the revenue ($2500) subtracted by the costs ($1500), which gives us $1000. Over 52 Saturdays in a year, this amounts to $52,000 ($1000 * 52). The $52,000 is the opportunity cost of not working on Saturday. This represents the amount of profit Ken is foregoing to give his employees the day off.
Regarding why we don’t need to consider rent or depreciation of office equipment, those are considered sunk costs. Sunk costs are expenses that have already been incurred and cannot be recovered. These costs do not change regardless of business operations, hence, they are not relevant when considering incremental costs for extra operation days.
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B) His instrumentality estimates will be lower and his expectancy estimates will remain the same
C) His expectancy estimates for the next quarter will be lower
D) Neither her expectancy nor instrumentality estimates will change
E) His expectancy estimates for the next quarter will be higher
Answer:
Option E
His expectancy estimates for the next quarter will be higher
Explanation:
Will Presley's expectancy rate will be higher in the next sales quarter. This is because he feels that the birth of his new baby is instrumental to his his poor sales performance. Now that he feels that factor has been taken out of the way, he expects that there will be a great increase in the next sales quarter.