Question-1; 

Glencore Capital belongs to a risky class of business for which the appropriate discount rate is 10 percent. The company currently has 100,000 outstanding shares selling at 70 Taka each. The firm is contemplating the declaration of a 5-taka dividend at the end of the fiscal year that just began.

Answer the following questions based on the Miller and Modigliani model, as discussed in class.

a)What will be the price of the stock on the ex-dividend date if the dividend is declared?

b)What will be the price of the stock at the end of the year if the dividend is not declared?

c)If Glencore Capital makes 3.25 million Taka of new investments at the beginning of the period, earns net income of 1.1 million, and pays the dividend at the end of the year, how many shares of new stock must the firm issue to meet its funding needs?

d)If the company decides instead to issue a 1-for-1 stock split AND a 5-taka dividend what would be the adjusted stock price?

e)If the company does a 1-for-4 Reverse stock split and then issues a 5-taka dividend then what would be the adjusted stock price?

f)If the company issues a 5% stock dividend and a 5-taka cash dividend then what would be the adjusted price?

An analyst has gathered the following information about a private company and its publicly traded competitor with similar capital structures and leverage:

Comparable Companies Tax Rate (%) Debt/Equity Unlevered Beta

Private company 30.0 1.00 ?

Public company 35.0 0.90 1.75

g)Estimate unlevered beta for the private company given the above information.

Question-2: 

Trump Hotels currently has 1.4 million common shares of stock outstanding and the stock has a beta of 1.7. It also has $8 million face value of bonds that have five years remaining to maturity and 6 percent coupon with semi-annual payments, and are priced to yield 11.65 percent.

If Trump Hotels issues up to $2.5 million of new bonds, the bonds will be priced at par and have a yield of 11.65 percent. If it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16 percent. Trump Hotels have learned that it can issue new common stock at $10 a share.

The current risk-free rate of interest is 2 percent and the expected market return is 9 percent. Trump's marginal tax rate is 25 percent.

If Trump Hotels raises $7.5 million of new capital while maintaining the same debt-to-equity ratio, what will be its weighted average cost of capital?