c. The $500,000 EBIT given previously is actually the expected value from the following probability distribution: Probability 0.10 0.20 0.40 0.20 0.10 EBIT ($100,000) 200,000 500,000 800,000 1,100,000 Determine the times-interest-earned ratio for each probability. What is the probability of not covering the interest payment at the 40% debt level? Probability %
c. The $500,000 EBIT given previously is actually the expected value from the following probability distribution: Probability 0.10 0.20 0.40 0.20 0.10 EBIT ($100,000) 200,000 500,000 800,000 1,100,000 Determine the times-interest-earned ratio for each probability. What is the probability of not covering the interest payment at the 40% debt level? Probability %
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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Transcribed Image Text:6. Problem 12-12
Capital Structure Analysis
Hagen Horticulture and Supplies Limited has no debt outstanding, and its financial position is given by the following data:
Assets (book market)
EBIT
Cost of equity, r
Stock price, P
Shares outstanding, n,
Tax rate, T
The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 40% debt based on
market values, its cost of equity, f,, will increase to 9.57% to reflect the increased risk. Bonds can be sold at a cost, ra, of 7%. Hagen is a no-growth.
firm. Hence, all its earnings are paid out as dividends, and earnings are expected to be constant over time.
a. What effect would this use of leverage have on the value of the firm?
The value of the firm would I
$4,000,000
$500,000
8.75%
$8
500,000
30%
b. What would be the market value of Hagen's equity?
Market value of equity=$
Transcribed Image Text:c. The $500,000 EBIT given previously is actually the expected value from the following probability distribution:
Probability
0.10
0.20
0.40
0.20
0.10
EBIT
($100,000)
200,000
500,000
800,000
1,100,000
Determine the times-interest-earned ratio for each probability. What is the probability of not covering the interest payment at the 40% debt level?
Probability
%
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