Absolute Corporation currently has $60 million in liabilities and common equity in combination. The firm has no preferred stock. The CFO constructed the following table to show the CEO the effect of changing the firm's capital structure. Amount of Debt in the Capital Structure $18,000,000 Market Price per Share (Po) Earnings per Share (EPS) $5.00 5.70 $101.80 24,000,000 112.75 30,000,000 6.70 110.50 According to this information, what is Absolute's optimal capital structure? Explain your answer. Round your answer to the nearest whole number. The optimal capital structure contains % of debt because it -Select- -Select- has the lowest amount of debt in the capital structure provides the highest market price per share of stock provides the highest earnings per share

Absolute Corporation currently has $60 million in liabilities and common equity in combination. The firm has no preferred stock. The CFO constructed the following table to show the CEO the effect of changing the firm's capital structure. Amount of Debt in the Capital Structure $18,000,000 Market Price per Share (Po) Earnings per Share (EPS) $5.00 5.70 $101.80 24,000,000 112.75 30,000,000 6.70 110.50 According to this information, what is Absolute's optimal capital structure? Explain your answer. Round your answer to the nearest whole number. The optimal capital structure contains % of debt because it -Select- -Select- has the lowest amount of debt in the capital structure provides the highest market price per share of stock provides the highest earnings per share

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Blue TJ’s has a market value equal to its book value. Currently, the firm has excess cash of $389,000, other assets of $911,674, and equity of $886,200. The firm has 60,000 shares of stock outstanding and net income of $984,800. Management has decided to spend 20 percent of the firm’s excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?
The Palantir is an all-equity firm with a total market value of $536,000 and 21,200 shares of stock outstanding. Management is considering issuing $133,000 of debt at an interest rate of 9 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities?
Bostian, Inc. has total assets of $510,000. Its total debt outstanding is $185,000. The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio? Select the correct answer. a. $95,450 b. $95,550 c. $95,601 d. $95,500 e. $95,651
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Flimsy Safe Room’s, Inc. has total assets of $1,000,000. The firm has $100,000 in inventory. It has $300,000 in long-term debt and $400,000 in current assets. The common stockholders’ equity is $400,000. The firm does not have any preferred stock outstanding. What is Flimsy Safe Room's total debt ratio defined as total liabilities to total assets? Question 1 options: A) 0.6 = 60% B) 0.4 = 40% C) 0.5 = 50% D) 0.3 = 30%
Nativity is a relatively small, privately owned firm. Last year the company had after-tax income of $15,000 and 10,000 shares were outstanding. The owners were tying to determine the value of the stock before prior to taking the company public. A similar firm that is publicly traded, had a P/E ratio of 5. Estimate the market value of one share the Nativity’s stock.
Xtel Inc. with a total market value of $630 million has $30 million in excess cash and no debt. Xtel has 1 million shares outstanding. Xtelʹs board is meeng to decide whether to pay out its $30 million in excess cash as a special dividend or to use it to repurchase shares of the firm’s stock. You own 1,000 shares of Xtel stock. Assume that Xtel uses the entire $30 million to pay a special dividend. You are unhappy with Xtelʹs decision and would prefer that Xtel used the excess cash to repurchase shares. What is the number of shares that you would have to buy at ex-dividend price in order to undo the special cash dividend that Xtel paid?

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