Consider a firm with an EBIT of $866,000. The firm finances its assets with $2,660,000 debt (costing 8 percent and is all tax deductible) and 560,000 shares of stock selling at $5.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 360,000 shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $866,000. Calculate the change in the firm's EPS from this change in capital structure. (Do not round intermediate calculations and round your final answers to 2 decimal places.) EPS before EPS after Difference

Consider a firm with an EBIT of $866,000. The firm finances its assets with $2,660,000 debt (costing 8 percent and is all tax deductible) and 560,000 shares of stock selling at $5.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 360,000 shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $866,000. Calculate the change in the firm's EPS from this change in capital structure. (Do not round intermediate calculations and round your final answers to 2 decimal places.) EPS before EPS after Difference

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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Currently, Dividend Airlines is an unlevered firm and expects to generate $330 free cash flow each year in perpetuity. Its corporate tax rate is 37%. The firm is considering a capital structure to allow $361 of debt. The debt is assumed to be rolled over when it matures with the same amount of principal. Its cost of debt capital is 15%. Similar unlevered firms in the same industry have a cost of equity capital of 28%. Assume no agency costs nor default risk. What will the value of Dividend Airlines be after the change of capital structure?
Start-Up Industries is a new firm that has raised $360 million by selling shares of stock.Management plans to earn a 20% rate of return on equity, which is more than the 15% rate of return available on comparable-risk investments. Half of all earnings will be reinvested in the firm. What will be Start-Up’s ratio of market value to book value? What will be Start-Up’s ratio of market value to book value if the firm can earn only a rate of return of 5% on its investments?
An all-equity firm currently has 1,000,000 shares of stock outstanding and is considering borrowing $5,000,000 at 10% and buying back one-fourth of those shares. Assume a tax rate of 30% and EBIT is $ 1,500,000. Should this company undertake the capital restructuring and why?
Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of rs = 10%. New common stock in an amount up to $9 million would have a cost of re = 13.0%. Furthermore, Olsen can raise up to $3 million of debt at an interest rate of rd = 11% and an additional $6 million of debt at rd = 15%. The CFO estimates that a proposed expansion would require an investment of $7.4 million. What is the WACC for the last dollar raised તો
Bhupatbhai
Zerox Inc. is contemplating acquiring its peer firm-Nova Corporation since Zerox believes that Nova is poorly managed. The most recent information about Nova is as follows: FCFF = 200 million, Market value of equity=$2,000 million, Outstanding debt=200 million, Before-tax cost of debt=5%, Tax rate=30%, Beta=1. Nova is already in steady state and is expected to grow 6% a year in the long term. The treasury bond rate is 3%, and the market risk premium is 6%. Zerox believes that the current financial leverage of Nova is not optimal and intends to increase the debt ratio of Nova to 20% of total capital from current level after the acquisition, which will incur a cost of debt of 5.5%. How much is the value of control worth in this acquisition plan?rnrnGroup of answer choicesrnrna). $203.27 millionrnb). $2,526.32 millionrnc). $2,152.28 millionrnd). $756.50 millionrne). $193.27 million
Hawar International is a shipping firm with a current share price of $4.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $10 million and repurchasing shares. a. With perfect capital markets, what will the share price be after this announcement? b. Suppose that Hawar pays a corporate tax rate of 40%, and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement? c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.55 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? Question content area bottom Part 1 a. With perfect capital markets, what will the share price be after this announcement? With perfect capital markets, the share price will be $enter your response here per share
Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,640,000 debt (costing 8.4 percent, all of which is tax deductible) and 214,000 shares of stock selling at $12 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,640,000 by selling additional shares of stock. The firm’s tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1,000,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS.
Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,650,000 debt (costing 8.6 percent, all of which is tax deductible) and 216,000 shares of stock selling at $18 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,700,000 by selling additional shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1,000,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Do not round intermediate calculations. Round your answers to 2 decimal places.) EPS before EPS after Changes in debt $ $ $ 2:19 1.80 0:40
Olsen Outfitters Inc. believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $2 million of retained earnings with a cost of rs = 13%. New common stock in an amount up to $9 million would have a cost of re = 15.5%. Furthermore, Olsen can raise up to $3 million of debt at an interest rate of rd = 11% and an additional $3 million of debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $5.6 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. %
Your company is financed 20% with riskless debt with a yield of 6% and 80% with equity with a cost of 14%. The corporate tax rate is 30%. a. What is the company's WACC at its existing capital structure? b. What would be the new WACC if it changes to being 40% debt financed?
Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $1 million of retained earnings with a cost of rs = 10%. New common stock in an amount up to $10 million would have a cost of re = 12.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 10% and an additional $4 million of debt at rd = 13%. The CFO estimates that a proposed expansion would require an investment of $8.4 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. %

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