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5. Simmons Mineral Operations, Inc. (SMO) currently has 100.000 shares of stock outstanding that sell for Rs.70 per share. Assuming no market imperfections or tax effects exist, what will the share price be after a) SMO has a five-for-three stock split? b) SMO has a 15 percent stock dividend? c) SMO has a 42.5 percent stock dividend? d) SMO has a four-for-seven reverse stock split? 6. TT Company needs a machine for the construction of a tunnel. One alternative is to lease the machine on 4-year contract for a lease payment of Rs.50,000 beginning of year payment. Alternatively, it could purchase a machine for Rs.200,000 financing by a bank loan with an interest rate of 10 percent and instalments are paid at the beginning of the year. The machine depreciated under MACRS 3-year property class. The cash salvage value of machine at the end will be Rs. 20,000. The corporate tax rate is 30 percent. a) What are the main benefits of leasing and purchasing? b) What is the cost of leasing? c) What is the cost of purchasing using the table method? d) Should the company lease or purchase the machine? e) Why company uses Kdt as a discount rate in evaluating leasing and purchasing decisions? 2 of 2 c) By what amount could the company reduce its working capital financing needs if it was able to stretch its payables deferral period to 35 days? 4. The ABC Company has warrants outstanding that allow the holder to purchase 3 shares of stock for a total of Rs. 60 for each warrant. Currently. the market price per share of the company common is Rs. 18. Investors hold the following probabilistic beliefs about the stock 6 months hence: Market price per share Rs. 16 Rs. 18 Rs. 20 Rs. 22 Rs 24 Probability 0.15 0.20 0.30 0.20 0.15 a) What is the present theoretical value of the warrant? b) What is the expected value of stock price 6 months hence? c) What is the theoretical value of the warrant 6 months hence? d) Would you expect the present market price of the warrant to equal its theoretical value? If not, why not? 5. Simmons Mineral Operations, Inc. (SMO) currently has 100.000 shares of stock outstanding that sell for Rs.70 per share. Assuming no market imperfections or tax effects exist, what will the share price be after a) SMO hus a five-for-three stock split? b) SMO has a 15 percent stock dividend? c) SMO has a 42.5 percent stock dividend? d) SMO has a four-for-seven reverse stock split? Group 'B': Problem-solving/case studies (20) 6. TT Company needs a machine for the construction of a tunnel. One alternative is to lease the machine on 4-year contract for a lease payment of Rs.50.000 beginning of year payment. Alternatively, it could purchase a machine for Rs.200.000 financing by a bank loan with an interest rate of 10 percent and instalments are paid at the beginning of the year. The machine depreciated under MACRS 3-year property class. The cash salvage value of machine at the end will be Rs. 20,000. The corporate tax rate is 30 percent a) What are the main benefits of leasing and purchasing? b) What is the cost of leasing? c) What is the cost of purchasing using the table method? d) Should the company lease or purchase the machine? e) Why company uses Kit as a discount rate in evaluating leasing and purchasing decisions? 2 of 2

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