1.

Find the value of a firm that can generate 300 FCF per year forever. The WACC is 9%.

2.

How might the firm’s level of business risk affect the optimal capital structure?

3.

If you believed in the bird-in-the-hand dividend theory, would you pay more dividends or fewer? Why?

4.

ABC Company has a cost of equity of 10%. EBIT is 100. They currently have no debt. Find the new cost of equity if they changed to using a capital structure that used 40% debt and 60% equity. The interest rate on the debt is 4% and the tax rate is 35%.

5.

How can taxes affect the firm’s optimal capital structure?

6.

Timco needs to invest 400 in new assets. They use a capital structure that is 40% debt and 60% equity. Next years net income is expected to be 500. Find the amount for the residual dividend.

7.

Timco has EBIT of 100. This should continue forever. The tax rate is 40%. The cost of equity is 12%. Find the firm’s value and the WACC if Timco uses no debt.

8.

In general, in what two ways might a financial decision affect firm value? I am not asking for specific examples, just the possible way this decision might have an influence.

9.

Why is an increase in dividends considered evidence that a firm’s managers are not taking advantage of the agency relationship?

10.

Provide support for the following statement: “Dividends don’t matter”.