1. A broker wants to sell a customer an investment costing $100 with an expected payoff in one year of $107. The customer indicates that a 7.0 percent return is not very attractive. The broker responds by suggesting the customer borrow $80 for one year at 5.0 percent interest to help pay for the investment.

a. What is the customers expected return if she borrows the money? (Round your answer to 1 decimal place.)

2. FARO Technologies, whose products include portable 3D measurement equipment, recently had 32 million shares outstanding trading at $40 a share. Suppose the company announces its intention to raise $350 million by selling new shares.

b. How large a loss in dollar terms will existing FARO shareholders experience on the announcement date, based on studies that show losses are 30% of the size of the new issue? (Enter your answer in millions.)

c. What percentage of the value of FAROs existing equity prior to the announcement is this expected gain or loss? (Round your answer to 1 decimal place.)

3. An all-equity business has 190 million shares outstanding selling for $20 a share. Management believes that interest rates are unreasonably low and decides to execute a leveraged recapitalization (a recap). It will raise $1 billion in debt and repurchase 50 million shares.

a. What is the market value of the firm prior to the recap? What is the market value of equity? (Enter your answers in billions rounded to 1 decimal place.

b. Assuming the Irrelevance Proposition holds, what is the market value of the firm after the recap? What is the market value of equity? (Enter your answers in billions rounded to 1 decimal place.)

d. Assume now that the recap increases total firm cash flows, which adds $280 million to the value of the firm. Now what is the market value of the firm? What is the market value of equity? (Enter your answers in billions rounded to 2 decimal places.)

d. At what price should FARO expect its existing shares to sell immediately after the announcement? (Do not round intermediate calculations. Round your answer to 2 decimal places.)