1. Speight system, Inc, has announced a right offer. This company has announced that it will take four rights to buy a new share in the offering at a subscription price of $33. At the close of business, the day before the ex-rights day, the companys stock sells for $58 per share. The next morning, you notice that the stock sells for $54 per share and the rights sell for $3 each. Are the stock and the rights correctly period on the ex right day? Describe a transaction in which you could use these prices to create an immediate profit in your own words.

2. Suppose your company needs $34 million to build a new assembly line. Your target debt-equity ratio is 0.65. The flotation cost for new equity is 7 percent, but the floatation cost for the debt is only 3 percent. Your boss has decided to fund the project by borrowing money because the floatation costs are lower and the needed funds are relatively small

1. What do you think about the rationale behind borrowing the entire amount?

2. What is your companys weighted average flotation cost, assuming all equity is raised externally?

3. What is the true cost of building the new assembly line after taking flotation costs into account? Does it matter in this case that the entire amount is being raised from debt?

3. Answer the following sub questions

1. What does alpha measure? What alpha would you like to see on your investment?

Common advice on Wall Street is Keep your alpha high and your beta low why? Explain in your own words using an example

2. In recent years, it has been common for companies to experience significant stock price changes in reaction to announcements of massive layoffs. Critics charge that such events encourage companies to fire long time employees and that Wall Street is cheering them on. Do you agree or disagree? Discuss with an example.

4. You bought one of Great White Shark Repellant Co.s 5.4 percent coupon bonds one year ago for $1,020. These bonds make annual payments and mature 14 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 1.5 percent. If the inflation rate was 3.9 percent over the past year, what was your total real return on investment?

5. You are considering a new product launch. The project will cost $1,980,000, have a four year life, and have no salvage value, depreciation is straight-line to zero. Sales are projected at 210 units per year, the price per unit will be $17,500, variable cost per unit will be $10,600, and fixed costs will be $570,000 per year. This required return on the project is 12 percent, and the relevant tax is 25 percent.

Based on your experience, you think the unit of sales, variable cost, and fix cost projection given here are probably accurate to within +/- 10 percent. You are, therefore, required to:

1. Show the OCF and NPV for the base case, the best case and worst case scenarios

2. Evaluate the sensitivity of your base-case, the base case NPV to changes in fixed costs.

3. Determine the cash break even level of output for this project (ignoring taxes) and the accounting break even level of output for this project

4. Show the degree of operating leverage at the accounting break even point? How do you interpret this number?