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12.a

or none of the above

12.b

12.c

12.d

Altona Inc. will introduce a new product to the market. Depending on how the product will do in the market, Altona estimates that the firm will have a value of either $90 million, $160 million, or $190 million next year, with equal probability for each of the three outcomes. Assume that the cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable) so that the project has a beta of O and a cost of capital equal to the risk-free rate, which is currently 7%. Assume perfect capital markets. Suppose that if Altona defaults, the value of firm's assets will go down by 25% due to bankruptcy costs and suppose that Altona has zero-coupon debt with a $120 million face value that is due next year. The total value of Altona today with leverage and the present value of its financial distress costs are closest to $80 million and $2.5 million $121 million and $4.7 million $130 million and $7.0 million $145 million and $11.2 million Which of the following is NOT an indirect cost of bankruptcy? Fire sales of assets Loss of employees Loss of customers Loss of suppliers Loss of payables Fitzroy Ltd. is a firm with 30 million shares outstanding and a corporate tax rate of 30%. Fitzroy has just announced that it will give $50 million that it has in excess cash to its shareholders via a special cash dividend. However, its shareholders always thought that the company would keep this excess cash forever. The change in Fitzroy's stock price as a result of this announcement is closest to: $0.30 $0.50 $0.80 $1.10 None of the above Consider a company that issued $150 million in permanent debt (at par) that has an annual coupon rate of 5%. The company is going to pay only interest on this debt. Assume a corporate tax rate of 20% for the company. The present value of the company's annual interest tax shield is closest to: $1.5 million $15 million $30 million $50 million None of the above Altona Inc. will introduce a new product to the market. Depending on how the product will do in the market, Altona estimates that the firm will have a value of either $90 million, $160 million, or $190 million next year, with equal probability for each of the three outcomes. Assume that the cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable) so that the project has a beta of O and a cost of capital equal to the risk-free rate, which is currently 7%. Assume perfect capital markets. Suppose that if Altona defaults, the value of firm's assets will go down by 25% due to bankruptcy costs and suppose that Altona has zero-coupon debt with a $120 million face value that is due next year. The total value of Altona today with leverage and the present value of its financial distress costs are closest to $80 million and $2.5 million $121 million and $4.7 million $130 million and $7.0 million $145 million and $11.2 million Which of the following is NOT an indirect cost of bankruptcy? Fire sales of assets Loss of employees Loss of customers Loss of suppliers Loss of payables Fitzroy Ltd. is a firm with 30 million shares outstanding and a corporate tax rate of 30%. Fitzroy has just announced that it will give $50 million that it has in excess cash to its shareholders via a special cash dividend. However, its shareholders always thought that the company would keep this excess cash forever. The change in Fitzroy's stock price as a result of this announcement is closest to: $0.30 $0.50 $0.80 $1.10 None of the above Consider a company that issued $150 million in permanent debt (at par) that has an annual coupon rate of 5%. The company is going to pay only interest on this debt. Assume a corporate tax rate of 20% for the company. The present value of the company's annual interest tax shield is closest to: $1.5 million $15 million $30 million $50 million None of the above

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