Cypress Corporation had net income of $40,000 this year. The marginal tax rate
Subject: Business   / Finance
Question
1a) Cypress Corporation had net income of $40,000 this year. The marginal tax rate is 40% and the dividend payout ratio is 30%. Cypress bonds currently sell at 95 with a 20 year maturity and an annual coupon rate of 7%. The last dividend paid on Cypress common stock was $0.90. Cypress common stock currently sells for $8.59. The expected growth rate is 5%. If Cypress issues new common stock the flotation cost will be 10%. Cypress has determined its optimal capital structure is 30% debt and 70% equity. What is the weighted average cost of capital for Cypress? What is the significance of this number?
1b) What would happen to Cypress’s WACC if they change to a debt structure of 70% debt and 30% equity?
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4) Based on the following current information, what is the value of a share of common stock in Cypress Corporation?
After-tax operating income is $500 million
Depreciation expense is $100 million
Capital expenditures are $200 million
No change in net working capital
Free cash flow is expected to grow by 6% per year
Cost of equity is 14%
WACC is 10%
Market value of debt is $3 billion
The company has 200 million shares of common stock outstanding
5) Determine the current dividend policy utilized by Apple Computer. How does this compare to prior dividend policies of Apple?
6) If the efficient market hypothesis (EMH) is true in the semi-strong form. Would reading The Wall Street Journal daily allow you to earn a return greater than the market averages? Why or why not?
7) Cypress Corporation sells watches for $25 each. Fixed costs are $140,000 for production of 30,000 or less watches. Variable costs are $15 per unit.
a) What is the breakeven point for Cypress?
b) Explain how you would reduce the breakeven point if you were the CEO of General Motors?
8 In problem 1a if the current beta of Cypress is 1.2, what would be the unlevered beta using the Hamada Equation assuming a 40% tax rate?
10) Utilizing the extended DuPont equation evaluate Microsoft based on the most current financial statements.
20) What is the estimated EVA of Berkshire Hathaway based on the most current financial statements?
