I need answer of this question Calculate the return on equity ROE) under each ofthe three economic scenarios before any debt isissued.Money, Inc., has no debt outstanding and a totalmarket value of $150,000. Earnings before interestand taxes, EBIT, are projected to be $28,000 ifeconomic conditions are normal. If there is astrong expansion in the economy, then EBIT willbe 20 percent higher. If there is a recession, thenEBIT will be 25 percent lower Money isconsidering a $60,000 debt issue with an interestrate of 7 percent. The proceeds will be used torepurchase shares of stock. There are currently10,000 shares outstanding. Ignore taxes. Assumethe company has a market-to-book ratio of 1.0.

Step 1: Identify the total market value of the company (equity)Step 2: Determine the EBIT for each…

Answered: Calculate the return on equity ROE)…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 27P

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The table below shows the forecast cash flow information of Good Time Inc. for the next year. The required debt payment in the next year is $88 million, with the current market value of $75 million. The company pays no tax. If you invest in the corporate debt of Good Time Inc. today, what is your expected return on this investment? Cash flow in the next year Economy Probability Amount Boom 0.6 $148 million Recession 0.4 I$61 million O 18.77% O 10.29% O 2.93% O 28.67%
A firm will earn a taxable net return of $500 million next year. If it took on debt today, it would have to pay creditors\varepsilon(rDebt) = 5% + 10% x wDebt2. Thus, if the firm has 100% debt, the financial markets would demand 15% expected rate of return. Further, assume that the financial markets will lend the firm capital at this overall net cost of 15%, regardless of how the firm is financed. The firm is in the 25% marginal tax bracket. 1. If the firmis fully equity-financed, what is its value? 2. Using APV, if the firm is financed with equal amounts of debt and equity today, what is its value? 3. Using WACC, if the firm is financed with equal amounts of debt and equity today, what is its value? 4. Does this firm have an optimal capital structure? If so, what is its APV and WACC?
Imagine a firm with one period of operations. In case of a strong economy, the FCF from operations at year 1 will be $2,800. In case of a weak economy, the FCF at year 1 will be $1,800. Both scenarios are equally likely to happen. The risk-free rate is 3% and the equity risk premium is 12% per year. Under these circumstances, if the cost of levered equity is 28%, how much debt financing does the firm use? $1,070 $960 $1,110 $1,000 O $1,040
If the interest rates rise by 1.5%, what is the change in net interest income assuming a parallel shift in the yield curve? Define the maturity bucket approach as an extension to the gap analysis, and how it can be used to manage interest rate risk.B.A bank has $100 million in earning assets, a net interest margin of 5%, and a 1-year cumulative GAP of $10 million. Interest rates are expected to increase by 2%. If the bank does not want net interest income to fall by more than 25% during the next year, how large can the cumulative GAP be to achieve the allowable change in net interest income?
The total in rate sensitive assets for a financial institution is $120 million and the total in rate sensitive liabilities is $95 million. What is the cumulative pricing gap (CGAP) and what is the interest rate sensitivity gap ratio if total assets equals $195 million? What would the projected change to net income be if interest rates rose by 2% on both assets and liabilities? What would the projected change to net income be if interest rates declined by 2% on both assets and liabilities? What would the projected change to net income be if interest rates rose by 1.8% on assets and 1.5% on liabilities? What would the projected change to net income be if interest rates declined by 1.8% on assets and 1.5% on liabilities?
See Financial question attached.
answer quickly, Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm canborrow at 11 percent. Bruce currently has no debt, and its cost of equity is18 percent. The tax rate is 31 percent.Given the above information;a) Complete the table given below for varying levels of debt below by usinga mix of the given information and using your own computations.EBIT $100,000Cost of debt 11%Cost of equity when unlevered 18%Tax rate 31%Debt $0 $10,000 $20,000 $30,000Cost of Equity when leveredEquityD/EVuVLWACCb) Plot the results from the table into the following two graphs:i) Value of the firm vis-à-vis- Total debtii) Cost of capital of the firm vis-à-vis D/E ratio.iii) Which MM propositions have you demonstrated?
Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%. a. What is the value of the debt at Date 0? What is the value of the equity at Date 0? b. Suppose the government announces that it guarantees the company’s payment to the debtholders. How much is the government guarantee worth?
Assume that the economy can experience high growth, normal growth, or recession. Under these conditions, you expect the following stock market returns for the coming year: State of the Economy High Growth Normal Growth Recession Probability 0.2 0.7 0.1 Return 60% 18% 2% a. Compute the expected value of a $1,000 investment over the coming year. If you invest $1,000 today, how much money do you expect to have next year? What is the percentage expected rate of return? Instructions: Enter dollar values rounded to the nearest whole dollar and percentages rounded to one decimal place. The expected value is $ and the expected rate of return is b. Compute the standard deviation of the percentage return over the coming year. Standard deviation = % = %. c. If the risk-free return is 7 percent, what is the risk premium for a stock market investment? Risk premium %
Your consulting firm will produce cash flows of $145,000 this year, and you expect cash flows thereafter to keep pace with any increase in the general level of prices. The interest rate currently is 6.9%, and you anticipate inflation of about 2.9%. a. What is the present value of your firm's cash flows for years 1 through 5? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Present value $ Present value 279,013.75 b. How would your answer to (a) change if you anticipated no growth in cash flow? Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Your consulting firm will produce cash flows of $190,000 this year, and you expect cash flows thereafter to keep pace with any increase in the general level of prices. The interest rate currently is 5.2%, and you anticipate inflation of about 1.2%. a. What is the present value of your firm's cash flows for years 1 through 5? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Present value b. How would your answer to (a) change if you anticipated no growth in cash flow? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Present value
Assume that the economy can experience high growth, normal growth, or recession. Under these conditions you expect the following stock market returns for the coming year: State of the Economy High Growth Normal Growth Recession. Probabilities 0.2 0.7 0.1 Return +30% +12% -15% 1. Compute the expected value of a $2000 investment over the coming year. If you invest $2,000 today, how much money do you expect to have next year? 2. Compute the standard deviation of the percentage return over the coming year.

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