Financial accounting 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.

Since the firm has a market-to-book value of 1.0, the total equity of the firm is equal to the…

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%
Maynard Inc. has no debt outstanding and a total market value of $ 250,000. Earnings before interest ana taxes, EBIT, are projected to be $ 28,000 if economi conditions are normal. If there is strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 50% lower. Maynard is considering a $ 90,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. Suppose the company has a market-to-book ratio 1.0 a. Calculate return of equity (ROE) under each of the three economic scenarios before any debt issued. Also calculate the percentage changes in ROE for economic expansion dan recession, assuming no taxes b. Repeat Part (a) assuming the firm goes through with the proposed recapitalization c. Repeat Part (a) and (b) of this problem assuming the firm has a tax rate of 35 percent Thanks in advance
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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?
Your company doesn't face any taxes and has $755 million in assets, currently financed entirely with equity. Equity is worth $50.50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Recession Average Boom Probability of State .20 .60 .20 Expect EBIT in State $105 million $180 million $240 million The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure? (Round your intermediate calculations and final answer to 2 decimal places except calculation of number of shares which should be rounded to nearest whole number.)
Money, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15% higher. If there is a recession, then EBIT will be 20% lower. Money is considering a $120,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 11,000 shares outstanding. Ignore taxes for this problem. a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession.
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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 %
You’ve collected the following information about Odyssey, Inc.:Sales =$165,000Net income = $14,800Dividends = $9,300Total debt = $68,000Total equity = $51,000What is the sustainable growth rate for the company? If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt –equity ratio? What growth rate could be supported with no outside financing at all?
Happy Time Inc. is expected to generate the following cash flows for the next year, as shown in the table below. Happy Time now only has one outstanding debt with a face value of $110 million to be repaid in the next year. The current market value for the debt is $67 million. The tax rate is zero. If the firm is financed by common equity and debt, what is the expected value of common equity next year? Cash flow in the next year Probability Amount Economy Boom 0.3 $110 million Normal 0.4 $101 million Recession 0.3 $61 million $26.8 million $24.7 million $0 -$18.3 million
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.
Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 31 percent. Given the above information; a) Complete the table given below for varying levels of debt below by using a mix of the given information and using your own computations. EBIT $100,000.00 Cost of debts 11% cost of equity when unlevered 18% Tax rate 31% Debts $0 $10,000.00 $20,000.00 $30,000.00 Cost of Equity when levered Equity D/E Vu VL WACC b) 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?

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