Question # 1

A) Maestro Frozen Foods expects to earn $365,000 in perpetuity before interest and taxes from its line of gourmet TV dinners. The company has a debt to assets ratio of 40%. The cost of debt is 10%. If the company had no debt, its cost of capital would have been 15%. The firm's tax rate is 30%. What is the value of the firm? The value of its equity? The required rate of return on equity. The weighted average cost of capital?

B) Explain homemade leverage and why it matters

C) Based on M&M without taxes and with taxes, how much time should a financial manager spend analyzing the capital structure of their firm? How about based on the static theory?

Question # 2

1. a) Suppose that, one year ago, you bought 100 shares of Zimmer Corporation common stock for $32 per share. During the year, you received dividends of $2.50 per share. Bradley common stock is currently selling for $33.50 per share.What was your total dividend income during the year? How much did you earn in capital gains? What was your total dollar return? Use these dollar returns to calculate the dividend yield, capital gains yield and total percentage return for this investment.

B. Define the three forms of market efficiency.

c.Explain why it is that in an efficient market, investments have an expected NPV of zero.

Question # 3

Pearson International Souvenir Shop has a cost of debt of 8 percent, a cost of equity of 12 percent, and a cost of preferred stock of 9 percent. The firm has 116,000 shares of common stock outstanding at a market price of $24 a share. There are 51,000 shares of preferred stock outstanding at a market price of $38 a share. The bond issue has a face value of $900,000 and a market quote of 105. The company's tax rate is 35 percent. What is the weighted average cost of capital for Pearson International Souvenir Shop

Question # 4

You want to invest in a project in Canada. The project has an initial cost of C$1.6 million and is expected to produce cash inflows of C$750,000 a year for 3 years. The project will be worthless after the first 3 years. The expected inflation rate in Canada is 5 percent while it is only 3.5 percent in the U.S. The applicable interest rate for the project in Canada is 12 percent. The current spot rate is C$1 = $0.8637. What is the net present value of this project in Canadian dollars using the foreign currency approach?