Assume that Firm A is an all-equity firm with total assets of $1,000 and the following distribution ofEBIT for the coming year:ProbabilityEBITInterestEBTTaxes (40%)Net IncomeBEPROAROE1.99%2.79%3.49%Firm A(Unlevered)2.32%2.83%Bad30%$120SO$120$48$7212.0%7.2%EconomyAverageNow assumeAs you can calculate, the standard deviation of the ROE distribution is 1.39 percenthat the firm plans to issue $300 of debt, at an interest rate of 10 percent, and use the proceeds torepurchase equity (you may ignore potential impacts on price and assume that the firm will thenhave $700 of equity). Determine the standard deviation of the new ROE distribution if the firmdoes issue this debt.40%$150$0$150-$60$90Good30%$180SO$180-$72$10815.0%18.0%9.0%10.8%9.0% 10.8%

Name: Assume that Firm A is an all-equity firm with total assets of $1,000
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Description: Assume that Firm A is an all-equity firm with total assets of $1,000 and the following distribution ofEBIT for the coming year:ProbabilityEBITInterestEBTTaxes (40%)Net IncomeBEPROAROE1.99%2.79%3.49%Firm A(Unlevered)2.32%2.83%Bad30%$120SO$120$48$7212

If the company issues debt, we must apply the standard deviation of a portfolio calculation, which…

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Assume that Firm A is an all-equity firm with total assets of $1,000 and the following distribution of EBIT for the coming year: Probability EBIT Interest EBT Taxes (40%) Net Income BEP ROA ROE 1.99% Ⓒ 2.79% Firm A (Unlevered) O 3.49% O 2.32% 2.83% Bad 30% $120 SO $120 -$48 $72 12.0% 7.2% 7.2% Economy Average 40% $150 $0 $150 -$60 $90 As you can calculate, the standard deviation of the ROE distribution is 1.39 percent. Now assume that the firm plans to issue $300 of debt, at an interest rate of 10 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $700 of equity). Determine the standard deviation of the new ROE distribution if the firm does issue this debt. Good 30% $180 SO $180 -$72 $108 15.0% 18.0% 9.0% 10.8% 9.0% 10.8%

Assume that Firm A is an all-equity firm with total assets of $1,000 and the following distribution of EBIT for the coming year: Probability EBIT Interest EBT Taxes (40%) Net Income BEP ROA ROE 1.99% Ⓒ 2.79% Firm A (Unlevered) O 3.49% O 2.32% 2.83% Bad 30% $120 SO $120 -$48 $72 12.0% 7.2% 7.2% Economy Average 40% $150 $0 $150 -$60 $90 As you can calculate, the standard deviation of the ROE distribution is 1.39 percent. Now assume that the firm plans to issue $300 of debt, at an interest rate of 10 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $700 of equity). Determine the standard deviation of the new ROE distribution if the firm does issue this debt. Good 30% $180 SO $180 -$72 $108 15.0% 18.0% 9.0% 10.8% 9.0% 10.8%

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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Assume a capital structure where stock is 50% and costs 14%, bonds are 40% and cost 8% and preferred is 10% and costs 11% what is the weighted average cost of capital when taxes are 25%___________?
What is the ROE for a firm with a times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.68 million if equity equals $1.68 million? O 23.81% O 25.22% 33.60% 40 48% 21
Assume there are two firms with a MV of $50,000,000. Firm A consists of 10% debt and 90% equity. Firm B consists of 40% debt and 60% equity. Assume perfect capital markets and M&M Proposition 2 holds. Which firm will have a higher expected return for equity holders? Why? For the toolhar prace ALT+F10/PC or ALT+FN+F10 (Mac).
Consider the following data for the firms Acme and Apex: Acme Apex Required: Equity Debt ($ million) ($ million) 210 1,050 105 350 ROC Cost of Capital (*) (%) 17% 9% 15% 10% a-1. Calculate the economic value added for Acme and Apex. a-2. Which firm has the higher economic value added? b-1. Calculate the economic value added per dollar of invested capital for Acme and Apex. b-2. Which firm has the higher economic value added per dollar of invested capital? Answer is not complete. Complete this question by entering your answers in the tabs below. Required A1 Required A2 Required B1 Required B2 Calculate the economic value added for Acme and Apex. Note: Enter your answers in millions rounded to 2 decimal places. Economic value added for Acme million Economic value added for Apex million
F1
K SIROM Scientific Solutions has $4 million of outstanding equity and $12 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 1. If the market risk premium is 9% and the risk - free rate is 4%, compute the weighted average cost of capital if the firm's tax rate is 25%. OA. 6.71% OB. 5.8% C. 5.49% D. 6.1%
Assume Skyler Industries has debt of $4,386,000 with a cost of capital of 7.5% and equity of $5,814,000 with a cost of capital of 10.2%. What is Skyler’s weighted average cost of capital? Round your intermediate calculations and final answer to 3 decimal places. _____%
Determine Garneau's optimal capital structure based on the following information: Debt EPS DPS Stock Price 20% 2.2 1.1 40.12 30% 2.4 40% 2.6 50% 2.8 Equity 80% 70% 60% 50% O a. 20% debt; 80% equity O b. 40% debt; 60% equity O c. 50% debt; 50% equity O d. 30% debt; 70% equity 1.2 1.3 1.4 41.34 40.52 39.42
If the earnings per share of the firm is OMR 10 and the market price is OMR 100 and the growth rate is earning of the firm is 5 %. Calculate the cost of equity share capital. a. 12.5% b. 10% c. None of these d. 15%
Table 9.1 A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Source of Capital Long-term debt Preferred stock Common stock equity Target Market Proportions OA. 8.13 percent OB. 4.67 percent OC. 8 percent O D. 3.25 percent 20% 10 70 Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40. Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new…
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