F is an all-equity firm with assets worth m1. Current expected return on F equity is 9%. F borrows k500 and uses it to pay a dividend to shareholders. You estimate that Fs cost of debt (after the operation) is 3%. What is Fs expected return on equity after the operation?

2. F is an all-equity firm with assets worth m1. Current expected return on F equity is 9%. F borrows k500 and uses it to buy new assets at market value with the same risk as existing assets. You estimate that Fs cost of debt (after the operation) is 3%. What is Fs expected return on equity after the operation?

3. Fs has assets worth m1, 20,000 common stocks outstanding at a market price of 20 and risk-free debt. Expected return on equity is 15%, risk-free rate is 3%. F plans to invest k600 into new assets that generates an expected operating cash- flows of k30 next year which then grows at 3% per year forever. These new assets have the same risk as the firms existing assets. The acquisition is financed through the issuance of new common stocks and existing debt remains risk-free.

(a) What is the issue price and the number of stocks to be issued?

(b) What is the expected return on equity after the operation?

4. F0 and Fs are comparable. Their expected operating cash-flow is k200 per year (perpetuity). F0 has 100,000 shares outstanding at a market price of 25, and no debt. F has 100,000 shares outstanding, at a market price of 15, and risk-free debt. Risk-free rate is 3%. What is the expected return on Fs stock?

5. F is all-equity with 300,000 common shares outstanding. Current market price of one stock is 5.4. F plans to issues 500 new bonds, maturity one year, coupon 6.5%, face value 1,000. The proceeds from the issuance will be immediately paid out to stockholders. The market value of Fs assets in one year is 500,000 or 3,000,000 with equal probability. Following, the operation (after the payout), the market price of Fs stocks adjust to 3.75. What is the cost of debt for F?

6. F is an all-equity firm, with equity of 0.8. F decides to issue new debt and pay out the proceeds from the issuance to investors. Following the operation, Fs leverage increases to 0.6, and the equity to 1.2. Is Fs debt risk-free?