Corporate Finance

Exercise 1

Explain the differences between capital budgeting decisions and capital structure decisions.

Explain the differences between an operating lease and a capital lease.

Exercise 2

Below the balance sheet of ABC Ltd.

The company whishes to distribute $200,000 to its shareholders

The company has 30,000 shares of common stock outstanding

1. Assuming the value of the company equals the value of its total assets, what are the par value and market value of one share of stock?

2. Prepare a balance sheet of the company in case it decides to distribute a $200,000 dividend. Calculate the value of one share of stick after the dividend payment

3. Assume now that instead of paying dividends the company decides to repurchase some of its stocks for $200,000. Prepare the balance sheet after the stock repurchase and calculate the new value of one share of stock

Exercise 3

Bigfi, Inc., is proposing a rights offering.

There are 300,000 shares outstanding, trading at $20 each.

There will be 20,000 new shares issued at a $15 subscription price.

1. What is the new market value of the firm?

2. What is the ex-rights price?

3. What is the value of a right?

Exercise 4

The company BIGCO has just approved their last balance sheet.

The total value of the assets is 100 million €.

The company has an equity of 25 million € (25 thousand shares with a par value of 1 thousand €).

The remaining part is financed by 150 thousand bonds with a par value of 500€.

The bonds have a maturity of 5 years, with annual coupon payments. The coupon rate is 6,5% and the bonds are selling today at 100%.

The corporate tax rate is 25% and the Risk-free rate is 4%, the market return is just 6,5%.

The Beta of BIGCO is 1.2

Calculate the WACC and explain in detail all the steps.