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Homework 5 is due in a week and 11 is due in 24 hours
1. Say the level of the market as measured by the Dow Jones Industrial Average is currently at 12,000. A forecaster has made a prediction of 13,300 for the level of the market in one year, along with a 95% confidence interval whose lower bound is 12,500 and whose upper bound is 14,500. You know from experience that this particular forecaster tends to be both excessively optimistic and miscalibrated. Describe how you might debias this individual. Give a numerical example (making up relevant numbers as appropriate).
2. What steps must occur before bias can be successfully expunged? Describe the process.
3. The fact that risk and uncertainty are experienced differently might matter in times of financial crisis. What are the key differences between risk and uncertainty? Discuss.

Question 1 (1 point)
 
The Standard and Poor’s bond rating agency has given the debt of four different companies the following ratings. Please order the companies from lowest to highest by the interest rate that probably pay on their debt. 
Question 1 options:

D

AAA

C

BB

Question 2 (1 point)
 
Which of the following statements is (are) most CORRECT?
Question 2 options:

Chapters 11 bankruptcy is designed to help a firm restructure and emerge from bankruptcy.

Chapter 7 bankruptcy is designed for firm liquidation. 

Only corporations not cities or states can file for bankruptcy. 

The city of Detroit filed for bankruptcy in 2013. 

No city or state in the USA has ever defaulted on its debt. 

Question 3 (1 point)
 
Rank from 1 to 5 the priority of the claims to assets during liquidation under a Chapter 7 Bankruptcy?
Question 3 options:

Secured debt holders

Common stockholders

Trustee costs to administer bankruptcy

Federal taxes due

Unsecured debt holders

Question 4 (1 point)
 
Which of the following statements are correct.  More than one is possible. 
Question 4 options:

In a merger with synergies the post-merger value will exceed the sum of the two separate companies’ pre-merger values.

Synergistic benefits can arise from economies of scale.

Synergistic benefits cannot arise from financial economies.

Synergistic benefits can arise from laying off excess employees.

Question 5 (1 point)
 
A  holding company sells shares in its subsidiary which lowers its ownership to only 43%, thus, the tax returns of the parent and its subsidiary can no longer be consolidated. If the parent company’s marginal tax rate is 23% and if the exclusion on inter-company dividends is 70%, what is the effective tax rate on the inter-company dividends?
Your Answer:
Question 5 options:

Answer

Question 6 (1 point)
 
The equity owners of Mondo Cult Inc. are considering purchasing Pulpless.com Inc, a small online bookstore. Mondo’s analysts believe that the merger will result in incremental free flows and tax savings with a combined net present value of $230 million.  Pulpless has 2 million shares outstanding and zero debt. Pulpless’s current stock price is $4.35. What is the maximum price per share that Mondo should offer?
Your Answer:
Question 6 options:

Answer

Question 7 (1 point)
 
Mondo Cult is considering acquiring pulpless.com. Pulpless is currently financed with 0.28% debt at an interest rate of 0.13%. If the acquisition takes place the debt level will continue at the 0.28% target level and the interest rate will remain the same. Pulpless’s pre-merger beta is 1.9, and its tax rate is 0.34%. The risk-free rate is 0.04% and the market risk premium is 0.02%. What unleveraged discount rate will be used to value pulpless.com?
Your Answer:
Question 7 options:

Answer

Question 8 (1 point)
 
Mondo Cult is considering acquiring pulpless.com. Pulpless is currently financed with 0.2% debt at an interest rate of {rd}%. If the acquisition takes place the debt level will continue at the 0.2% target level and the interest rate will remain the same. Pulpless’s pre-merger beta is 1.7, and its tax rate is 0.4%. The risk-free rate is 0.03% and the market risk premium is 0.02%. What is the appropriate leveraged discount rate to value pulpless.com?
Your Answer:
Question 8 options:

Answer

Question 9 (1 point)
 
Mondo Cult Inc. is considering acquiring pulpless.com. If the unleveraged discount rate appropriate for the acquisition is 0.14 and pulpless is estimated to generate the following incremental cash flows to Mondo, what is the value of pulpless’s operations to Mondo?

Year

1

2

3

4

Free cash flow

$2

$2

$2

$6

Unlevered horizon value

 

 

 

35

Tax shield

  1

  1

  1

  4

Horizon value of tax shield

 

 

 

6

Your Answer:
Question 9 options:

Answer

Question 10 (1 point)
 
Mondo Cult Inc. is considering acquiring pulpless.com.  If the value to Mondo of pulpless’s incremental operations is $144, and Mondo has $58 of debt, what is the equity value of Pulpless from Mono’s perspective?
Your Answer:
Question 10 options:

Answer

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