Fezziwig International (FI) has been in the haberdashery business since 1869. It is an all-equity firm. At the end of the current year, Mr. Fezziwig expects EBIT to be $1.755M and the same earnings are expected annually in perpetuity. The company is not growing so CAPEX and investments in net working capital are zero. The cost of equity for FI is 9%. An identical firm to FI, Skimpole Sewing (SS), has $5.5M of long-term debt outstanding. What is the value of SS's equity? The corporate tax rate is 50%. Assume that Modigliani & Miller assumptions hold. $6.5M O $7.5M $8.0M $7.0M

Fezziwig International (FI) has been in the haberdashery business since 1869. It is an all-equity firm. At the end of the current year, Mr. Fezziwig expects EBIT to be $1.755M and the same earnings are expected annually in perpetuity. The company is not growing so CAPEX and investments in net working capital are zero. The cost of equity for FI is 9%. An identical firm to FI, Skimpole Sewing (SS), has $5.5M of long-term debt outstanding. What is the value of SS's equity? The corporate tax rate is 50%. Assume that Modigliani & Miller assumptions hold. $6.5M O $7.5M $8.0M $7.0M

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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Ketchup Corporation is currently trading at $40 per share. There are 0.5 million shares outstanding, and the company has no debt. You believe that the value of the company would increase by 20% over 1 year if the management were replaced. How much would you gain from acquiring 60% of Ketchup's shares by getting a 1-year, 10%-interest loan? Hint: you are not using your own money. The money for the investment comes from the loan. $4,000,000. $0. $2,400,000. $1,320,000. $1,200,000.
Ketchup Corporation is currently trading at $35 per share. There are 8 million shares outstanding, and the company has no debt. You believe that the value of the company would increase by 30% over 1 year the management were replaced. How much would you gain from acquiring 60% of the Ketchup's shares by getting a 1-year 10%-interest loan? Hint: you are not using your own money. The money for the investment comes from the loan Mutiple Choice $84.000.000 $50,400,000 $33,600,000 $0. $107,520.000
Jericho Snacks is an all-equity firm with estimated earnings before interest and taxes of $826,000 annually forever. Currently, the firm has no debt but is considering borrowing $650,000 at 6.75 percent interest. The tax rate is 34 percent and the current cost of equity is 17.2 percent. What is the value of the levered firm? $3,187,271 $3,169,535 $3,307,271 $3,390,535 $3,506,418
The Giant Machinery has the current capital structure of 65% equity and 35% debt. Its net income inthe current year is $250,000. The company is planning to launch a project that will require aninvestment of $175,000 next year. Currently, the share of Giant machinery is $25/share.Required:a) How much dividend Giant Machinery can pay its shareholders this year and what is the dividendpayout ratio of the company? Assume the Residual Dividend Payout Policy applies. b) If the company is paying a dividend of $2.50/share and tomorrow the stock will go ex-dividend.Calculate the ex-dividend price tomorrow morning. Assuming the tax on dividend is 15%. c) Little Equipment for Hire is a subsidiary in the Giant Machinery and currently under the liquidationplan due to the severe contraction of operation due to coronavirus. The company plans to paya total dividend of $2.5 million now and $ 7.5 million one year from now as a liquidating dividend.The required rate of return for shareholders is 12%.…
Organica Ltd. generates $350,000 cash flow each year. The cost of equity capital is 18% and the company has no debt outstanding. Organica would like to buy back $ 950,000 of its equity by borrowing the same amount at 12% per year. Assume that the debt will continue for an indefinite period and Modigliani and Miller proposition 1 holds, what is the cost of equity capital after the change in capital structure?
Company A is currently all-equity financed with 100 million shares. The EBIT will be 30 million in year1 and growing at 3% per year forever. The company always has a 40% corporate tax. The investorsdiscount cash flows from similar projects at 18% per year.Now, the company takes a 50-million loan to make distributions to the shareholders. The interest rateon the loan is 5%. There will be no principal repayments made until the loan is paid back in full in year5. Due to financial distress, 30% of Company A’s EBITs will be lost while it carries the 50-million debt.Capital gain tax is zero and dividend tax is 25%.a. If Company A announces that it will use the 50 million to repurchase shares, what will be the priceright after the share repurchase? What is the price right after the announcement?b. If Company A announces that it will use the 50 million to make a one-time dividend payout, what willbe the price right after the dividend payout? What is the price right after the announcement?
Lemansky Enterprises is considering a change from its current capital structure. The company currently has an all-equity capital structure and is considering a capital structure with 35 percent debt. There are currently 5,000 shares outstanding at a price per share of $50. EBIT is expected to remain constant at $29,680. The interest rate on new debt is 11 percent and there are no taxes. a. Rebecca owns $10,000 worth of stock in the company. If the firm has a 100 percent payout, what is her cash flow? Note: Do not round intermediate calculations and round your answer to 2 decimal places, 32.16. b. What would her cash flow be under the new capital structure assuming that she keeps all of her shares? Note: Do not round intermediate calculations and round your answer to 2 decimal places, 32.16. c. Suppose the company does convert to the new capital structure. Show how Rebecca can maintain her current cash flow. Note: Do not round intermediate calculations and round your answer to the…
Fields & Company expects its EBIT to be $107,000 every year forever. The company can borrow at 7 percent. The company currently has no debt and its cost of equity is 11 percent. The tax rate is 21 percent. The company borrows $162,000 and uses the proceeds to repurchase shares. a. What is the cost of equity after recapitalization? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of equity b. WACC % %

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