Assume that Firm A is an all-equity firm with total assets of $5,000 and the following distribution ofEBIT for the coming year:Fem AUnleveredProbabilityEBITInterestEBTTaxes (40%)Net IncomeBEPROAROEO2.653%O 3.487%2.800%O 3.098%Bad3.774%10.00%$500.00$0.00$500.00-$200.00$300.0010.00%6.00%6.00%EconomyAverage40.00%$700.00$0.00$700.00-$280.00$420.0014.00%8.40%8.40%Now assume that the firm plans to issue $2,000 of debt, at an interest rate of 6.4 percent, and usethe proceeds to repurchase equity (you may ignore potential impacts on price and assume that thefirm will then have $3.000 of equity). Given this information, determine the standard deviation ofthe new ROE distribution.Good50.00%$900.00$0.00$900.00-$360.00$540.0018.00%10.80%10.80%

Assume that Firm A is an all-equity firm with total assets of $5,000 and the following distribution of EBIT for the coming year: Fem A Unlevered Probability EBIT Interest EBT Taxes (40%) Net Income BEP ROA ROE Bad 10.00% $500.00 $0.00 $500,00 -$200.00 $300.00 10.00% 6.00% 6.00% Economy Average 40.00% $700.00 $0.00 $700.00 -$280.00 $420.00 14.00% 8.40% 8.40% Good 50.00% $900.00 $0.00 $900.00 -$360.00 $540.00 18.00% 10.80% 10.80% Now assume that the firm plans to issue $2,000 of debt, at an interest rate of 6.4 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $3,000 of equity). Given this information, determine the standard deviation of he new ROE distribution.

Assume that Firm A is an all-equity firm with total assets of $5,000 and the following distribution of EBIT for the coming year: Fem A Unlevered Probability EBIT Interest EBT Taxes (40%) Net Income BEP ROA ROE Bad 10.00% $500.00 $0.00 $500,00 -$200.00 $300.00 10.00% 6.00% 6.00% Economy Average 40.00% $700.00 $0.00 $700.00 -$280.00 $420.00 14.00% 8.40% 8.40% Good 50.00% $900.00 $0.00 $900.00 -$360.00 $540.00 18.00% 10.80% 10.80% Now assume that the firm plans to issue $2,000 of debt, at an interest rate of 6.4 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $3,000 of equity). Given this information, determine the standard deviation of he new ROE distribution.

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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Here is Icknield’s market-value balance sheet (figures in $ millions): Net working capital $550 Debt $800 long term assets $2,150 Equity $1,900 value of firm $2,700 $2,700 The debt is yielding 7%, and the cost of equity is 14%. The tax rate is 21%. Investors expect this level of debt to be permanent. a. What is Icknield’s WACC? b. How would the market-value balance sheet change if Icknield retired all its debt?
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
K SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 8% and the risk-free rate is 5%, compute the weighted average cost of capital if the firm's tax rate is 30%. OA. 15.17% OB. 17.44% O C. 15.93% OD. 16.68% ...
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%
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As the chief financial officer of Adirondack Designs, you have the following information: Next year's expected net income after tax but before new financing Sinking-fund payments due next year on the existing debt Interest due next year on the existing debt Common stock price, per share Common shares outstanding Company tax rate $ 37 million $12 million $7 million $26.5 17 million 45% a. Calculate Adirondack's times-interest-earned ratio for next year assuming the firm raises $47 million of new debt at an interest rate of 5 percent b. Calculate Adirondack's times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal $3.0 million c. Calculate next year's earnings per share assuming Adirondack raises the $47 million of new debt d. Calculate next year's times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Adirondack sells 1.2 million new shares at $22 a share instead of raising new debt. Note: Do not round…
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Consider a simple firm that has the following market-value balance sheet: Assets Liabilities end equity $1 040 Debt Equity $400 640 Next year, there are two possible values for its assets, each equally likely: $1 180 and $960. Its debt will be due with 4.9% interest. Because all of the cash flows from the assets must go to either the debt or the equity, if you hold a portfolio of the debt and equity in the same proportions as the firm's capital structure, your portfolio should earn exactly the expected return on the firm's assets. Show that a portfolio invested 38% in the firm's debt and 62% in its equity will have the same expected return as the assets of the firm. That is, show that the firm's pre-tax WACC is the same as the expected return on its assets. If the assets will be worth $1 180 in one year, the expected return on assets will be %. (Round to one decimal place.)
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Baker Industries has a profit margin of 3%, a total asset turnover of 2, total assets of $60 million, revenue of $150 million, and equity of $20 million. Compute Baker's return on equity. Question 5 options: 9.0% 45.0% 18.0% 15.0%

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