Lesson 661
1. (a) The price of Estee Lauder stock has risen to $90. What is the market value
of the firm’s equity?
# of equity share x market price of share
= 386.65 million x $90
= $34,798.5 million (the market value of the firm’s equity)
(b) The rating agency has revised Catalytic Concept’s bond rating to A. What
interest rate, approximately, would the company now need to pay on its bonds?
The company will have to pay 4.28% as interest on its bonds. Higher rated bonds are
traded at lower interest rate as they carry the lesser risk. The lower rated bonds are
repaid with higher interest as the risks attached to such bonds are higher.
(c) A farmer and a meatpacker use the commodity markets to reduce their risk.
One agrees to buy live cattle in the future at a fixed price, and the other agrees to
sell. Which one sells?
The seller will be the farmer. They both want to hedge against the future uncertainty of
the live-cattle prices. The meatpacker is afraid of rising prices while the farmer is afraid
of declined priced. They enter into a contract with commodity market. As per the
contract, the farmer agrees to sell the cattle at certain price and the meatpacker agrees
to buy the cattle.
Lesson 661
2.
Omega Corp
Balance Sheet
Cash
$15
Accounts Receivable
$35
Inventories
$50
Total Current Assets
$100
=(cash + accounts receivable + inventories)
Property, Plant and Equipment
520
Less: depreciaiton
$-120
Net Fixed Assets
$400
Accounts Payable
$35
Debt due for repayment
$25
Current Liabilities
$60
Long term Debt
$350
