Mercer Corp. has $10$ million shares outstanding and $$100$ million worth of debt outstanding. Its

current share price is $$75.$ Mercer's equity cost of capital is $8\mathrm{.}5\%.$ Mercer has just announced that

it will issue $$350$ million worth of debt. It will use the proceeds from this debt to pay off its existing

debt, and use the remaining $$250$ million to pay an immediate dividend. Assume perfect capital

markets.

a$.$ Estimate Mercer's share price just after the recapitalization is announced, but before the

transaction occurs.

b$.$ Estimate Mercer's share price at the conclusion of the transaction. $($Hint: Use the market value

balance sheet.$)$

c$.$ Suppose Mercer's existing debt was risk$-$free with a $4\mathrm{.}25\%$ expected return, and its new debt

is risky with a $5\%$ expected retum. Estimate Mercer's equity cost of capital after the

transaction.

In early $2018,$ Qualcomm Inc. had $$15$ billion in debt, total equity capitalization of $$88$ billion, and

an equity beta of $1\mathrm{.}33($as reported on Yahoo! Finance$).$ Included in Qualcomm's assets was $$24$

billion in cash and risk$-$free securities$.$ Assume that the risk$-$free rate of interest is $3\mathrm{.}1\%$ and the

market risk premium is $3\mathrm{.}9\%.$

a$.$ What is Qualcomm's enterprise value?

b$.$ What is the beta of Qualcomm's business assets?

c$.$ What is Qualcomm's WACC?

Indell stock has a current market value of $$170$ million and a beta of $1\mathrm{.}80.$ Indell currently has risk$-$

free debt as well. The firm decides to change its capital structure by issuing $$35\mathrm{.}96$ million in

additional risk$-$free debt, and then using this $$35\mathrm{.}96$ million plus another $$13$ million in cash to

repurchase stock. With perfect capital markets, what will be the beta of Indell stock after this

transaction?

Paul Rosenzweig is founder and CEO of OpenStart, an innovative software company. The company

is all equity financed, with $100$ million shares outstanding. The shares are trading at a price of $$1.$

Rosenzweig currently owns $20$ million shares. There are two possible states in one year. Either the

new version of their software is a hit, and the company will be worth $$180$ million, or it will be a

disappointment, in which case the value of the company will drop to $$75$ million. The current risk$-$

free rate is $3\%.$ Rosenzweig is considering taking the company private by repurchasing the rest of

the outstanding equity by issuing debt due in one year. Assume the debt is zero$-$coupon and will pay

its face value in one year.