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Nairobi Institute Of Business Studies *

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201

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Finance

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Nov 24, 2024

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Pewter & Glass is an all equity firm that has 60,000 shares of stock outstanding. The company is in the process of borrowing $375,000 at 9 percent interest to repurchase 25,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes ? $60,000 None of these $375,000 $420,000 $900,000 References Multiple Choice Learning Objective: 16-1 Diﬃculty: Basic Section: 16.3 Once Bitten Corp. uses no debt. The weighted average cost of capital is 8 percent. If the company's EBIT is $1,040,000 in perpetuity and there are no taxes , what is the company worth? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.) Note : For simplicity, in this chapter we typically assume that net capital spending equals depreciation, and net working capital remains constant. This means that EBIT (net of any taxes) will equal CFFA. Company's Value $ References Worksheet Learning Objective: 16-01 The effect of financial leverage. Difficulty: Basic Section: 16.03 Capital Structure and the Cost of Equity Capital Once Bitten Corp. uses no debt. The weighted average cost of capital is 8.4 percent, and the company's EBIT is expected to be a constant amount in perpetuity. The current market value of the equity is $29 million and the corporate tax rate is 35 percent. What is the company's EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16.) EBIT $     

Worksheet Learning Objective: 16-02 The impact of taxes and bankruptcy on capital structure choice. Difficulty: Basic Section: 16.04 M and M Proposition I without taxes DAR Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 180,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $2.6 million in debt outstanding. The interest rate on the debt is 8 percent annually, and there are no taxes. a. If EBIT is $575,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) EPS Plan I $ Plan II $ b. If EBIT is $825,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) EPS Plan I $ Plan II $ c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Break-even EBIT $ References Worksheet Learning Objective: 16-01 The effect of financial leverage. Difficulty: Basic Section: 16.02 The Effect of Financial Leverage You currently own 1,300 shares of JKL, Inc. JKL is an all equity that has 200,000 shares of stock outstanding at a market price of $35 a share. The company's earnings before interest and taxes are $1,400,000. You believe that the JKL should finance 20 percent of assets with debt, but management refuses to leverage the company. Given that similar firms' pay 10 percent interest on their debt, answer the following questions. Part A : How much money should you borrow to create the leverage on your own? Assume you can borrow funds at 10 percent interest. $ Part B : How many additional shares of JKL stock must you purchase (using the borrowed funds in Part A) to create the leverage on your own?

You currently own 800 shares of JKL, Inc. JKL is currently an all equity that has 500,000 shares of stock outstanding at a market price of $35 a share. The company's earnings before interest and taxes are $3,500,000. JKL recently decided to issue $4,375,000 of debt at 5 percent interest. This debt will be used to repurchase shares of stock. Ignore taxes and answer the following two questions: Part A: What is JKL's target debt to asset ratio? % Part B: How many shares of JKL stock must you sell to undo the leverage? Assume that you can loan out those funds at 5 percent interest. Hanover Tech is currently an all equity firm that has 200,000 shares of stock outstanding with a market price of $50.00 a share. The current cost of equity is 19 percent and the tax rate is 21 percent. The firm is considering permanently adding $4,500,000 of debt with a coupon rate of 5 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity? Round your answer to the nearest whole dollar, but don't include the $ sign. HINT : First get the value of the unlevered firm. Then calculate the value of the levered firm. The total value of any firm is the value of the debt plus the value of the equity. Meyer & Co. expects its EBIT to be $87,000 every year forever. The firm can borrow at 12 percent. Meyer currently has no debt, and its cost of equity is 16 percent. If the tax rate is 35 percent, what is the value of the firm? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Value of the firm $ What will the value be if the company borrows $160,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Value of the firm $ References Worksheet Learning Objective: 16-02 The impact of taxes and bankruptcy on capital structure choice. Difficulty: Basic Section: 16.04 M and M Proposition I without taxes

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Winter's Toyland has a debt-equity ratio of 1.20. The cost of debt is 9 percent and the required return on assets is 20 percent. What is the cost of equity if you ignore taxes? Write your answer as a percent rounded to two digits, but don't include the % sign (i.e. write 12.63, not 0.1263). Braxton Corp. currently has one million shares outstanding but no debt. If needed, however, the company can borrow at 7 percent interest. The company's WACC is currently 8.8 percent and the tax rate is 35 percent. a. What is the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity % b. If the firm converts to 15 percent debt, what will its cost of equity be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity % c. If the firm converts to 40 percent debt, what will its cost of equity be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity % d- 1 If the firm converts to 15 percent debt, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC % d- 2 If the firm converts to 40 percent debt, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC % References Worksheet Learning Objective: 16-01 The effect of financial leverage. Difficulty: Basic Section: 16.04 M and M Proposition I without taxes Johnson Tire Distributors has debt with both a face and a market value of $67,500,000. This debt has a coupon rate of 6 percent and pays interest annually. The expected earnings before interest and taxes is a constant $75,000,000 in perpetuity. The company's tax rate is 25 percent, and the unlevered cost of capital is 25 percent. What is the firm's cost of equity? Write your answer as a percent rounded to two digits, but don't include the % sign (i.e. enter 12.63, not 0.1263). HINT: You need to use both M&M propositions.