Blue Mountain Inc. has the cost of equity of 12% and the cost of debt of 6%. The firm’s corporate tax rate is 40%, and the debt-equity ratio is 0.5. Assume that Blue Mountain maintains a constant debt-equity ratio. Calculate Blue Mountain’s unlevered cost of capital and WACC respectively.
Corporate Finance Questions 1. Blue Mountain Inc. has the cost of equity of 12% and the cost of debt of 6%. The firm’s corporate tax rate is 40%, and the debt-equity ratio is 0.5. Assume that Blue Mountain maintains a constant debt-equity ratio. Calculate Blue Mountain’s unlevered cost of capital and WACC respectively. 2. Green Lake Corp. has 10 million shares outstanding with a market price of $25 per share and no debt. The company marginal tax rate is 40%. The CFO of Green Lake plans to issue a $100 million debt and use the proceeds to repurchase the outstanding shares. Assume that Green Lake prepares to repurchase the existing shares from the open market at $25 per share. What will the new share price be after the repurchase? 3. Suppose you are a stock option trading manager working in an investment bank. Blue Technology is a public Hi-Tech firm you are following, and its current market price is $35.50 per share. According to your analysis, you think its stock price will fluctuate within a narrow range between $32.25 and $37.75 in the next three months. However, you have very limited information on whether the stock price will increase or decrease. In such kind of circumstance, what kind of option strategies (i.e. the combination of buy and sell call or put options) you can use to make a profit on this stock? List at least one strategy and briefly explain.
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