:Solve the following.
Senyum Selalu Corporation has to decide on which of the following projects should be selected. Below is part of the relevant information obtained from the company.
Project
Rate of Return (%)
Project Cost (RM)
Abiad
15
180,000
Bastina
18
320,000
Choline
12
440,000
Damia
20
250,000
Everton
10
100,000
The firm's capital structure consists of RM1.4 million debt, RM800,000 in preferred stock and RM1.8 million in common equity. The capital mix is to be maintained for future investments. Before tax cost of debt is 12 percent for the first RM175,000 and thereafter the before tax cost will be 15 percent.
The after tax cost of preferred stock is 11.67 percent for the first RM120,000 and above that will be 12.68 percent
The common equity portion of the investment will be finance first by internally generated earnings of RM450,000. If additional common stock financing is needed, new shares can be issued at a price of RM30 minus floatation cost of RM5 per share. The last dividend paid to the shareholders for each share is RM2.8 and it should grow at an annual rate of 10 percent. The firm's marginal tax rate is 30 percent.
Construct weighted marginal cost of capital (WMCC) and investment opportunity schedule curve (IOS)
Which investment should Senyum Selalu Corporation accept?
Justify your answer
QUESTION 1 Consider the following interaction between a police officer (Player 1) and a motorist (Player 2). At the start of the interaction, the police officer observes the motorist speeding. The officer has three choices: leave the motorist alone (2), pull the motorist over to give her a ticket (7) or pull her over to arrest her (4). If the officer leaves the motorist alone then the game ends and both players get a payoff of 0. If the officer pulls her over, then the motorist decides whether to stay put (s) or drive away (d). When the motorist makes this decision, she only knows that the officer has pulled her over, but cannot tell whether the officer has decided to give her a ticket or to arrest her. If the motorist drives away then she is equally likely to get caught (C) and to escape (E). The von Neumann-Morgenstern payoffs are as follows: If the officer pulls the motorist over to give her a ticket and she stays put, then the officer gets 3 and the motorist gets -5. Arresting the motorist means extra paperwork for the police officer. Therefore, if the officer pulls the motorist over to arrest her and she stays put, then the officer gets a payoff of just 2, while the motorist gets -10. . If the officer pulls the motorist over and the motorist drives away and is caught, then the officer gets a payoff of 5, while the motorist gets - 15. If the officer pulls the motorist over and the motorist drives away and escapes, then the motorist gets 0; the officer gets -10 if he was pulling the motorist over to ticket her, and -11 if he was pulling her over to arrest her (since he will still have to do the extra paperwork). (a) (a.1) Represent this situation as an extensive-form game with the officer moving first. (a.2) Find all the subgame-perfect equilibria, including the mixed-strategy ones. (b) (b.1) Now represent the situation in a slightly different way: the officer is still moving first, but makes his decision in two steps: first he decides between leaving the motorist alone (2) and not leaving the motorist alone (-L); in the latter case he then makes the further decision whether to go for a ticket or for an arrest. (b.2) Find all the subgame-perfect equilibria, including the mixed-strategy ones. Now let us change the story a little bit. There are two types of police officers: those (the T type) who only give you a ticket (if you were speeding) and those (the A type) who arrest you. Each police officer knows his own type, but motorists only know the percentage of police officers who are types, which is p. The value of p is public information and thus common knowledge. The police officer now only has two choices: leave the motorist alone (2) or pull the motorist over (P); the further action (ticket or arrest) is automatic according to the type. The payoffs are as described above. (c) Use states and information partitions to represent this situation of incomplete information. Associate with every state the game that is played in that state. (d) Use the Harsanyi transformation to convert the situation of incomplete information into an extensive- form game. (e) Find all the pure-strategy Bayesian equilibria of the game of part (d) for the case where p =Weighted Average Cost of Capital The rm's target capital structure is the mix of debt, preferred stock, and common equity the rm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the rm's weighted average cost of capital (WACC). If the rm will not have to issue new common stock, then the cost of retained earnings is used in the rm's WACC calculation. However, if the rm will have to issue new common stock, the cost of new common stock should be used in the rm's WACC calculation. Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the rm's marginal tax rate is 40%. Assume that the rm's cost of debt, rd, is 8%, the rm's cost of preferred stock, rp, is 7.5% and the firm's cost of equity is 12% for old equity, rs, and 12.33% for new equity, re. What is the rm's weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity? Round your answer to 3 decimal places. Do not round intermediate calculations. % What is the rm's weighted average cost of capital (WACCz) if it has to issue new common stock? Round your answer to 3 decimal places. Do not round intermediate calculations. % Bookend Inc., has a current market value of $100 million, having raised $60 million in bonds. and $40 million by issuing equity. It considers the present capital structure optimal. It wants to raise an additional $40 million in capital by issuing both debt and equity. The debt portion consists of 20-year, 7% semi-annual coupon bonds at par. The flotation cost is 3.5%. The common stock currently sells for $30 per share and has a beta of 1.2. The last dividend was $1.40 and dividends are expected to grow at an annual rate of 6% for the indefinite future. The firm is in the 30% tax bracket. The flotation cost on new common is 5 % and the firm is in the 30% tax bracket. How much of the new investment must be financed by debt in order to maintain the present capital structure? $18 million $16 million O $15 million $24 million $12 million.1. Peach-Lemon problem Consider the market of used cars. Sellers have two types of cars: peaches (cars in good condition) and lemons (cars in bad condition). If a potential buyer is able to identify quality of a car, his is willing to pay $10000 for a peach and $5000 for a lemon. On the other hand, sellers is willing to sell a peach at $7500 and a lemon at $4000. The game unfolds as below: first, sellers choose to sell or not, and at which price to sell. After that, potential buyers choose to buy or not. Find equilibrium decisions in the following situations: a. There are four times as many peaches as lemons (q=4/5); (15 pts) b. There are four times as many lemons as peaches (q=1/5). (15 pts)
