Higgins currently has 2 million shares of common stock outstanding that are selling for $32 per share.Higgins also has a $20 million mortgage bond outstanding that has an 11% coupon rate. Higgins isconsidering two alternatives to financing a major expansion. Plan A is to sell $10 million of additional long- term debt with a 12.5% coupon. Plan B is to sell 200,000 shares of common stock at $30 per share and $4million in long- term debt with an 11.25% coupon. What is the EBIT indifference level between these twoalternatives? Assume the marginal tax rate is 40%. Question 20Answer a. $1,374,000 b. $2,650,000 c. $11,450,000 d. $4,554,000

You're right, the EBIT indifference level for Higgins in this scenario is d.…

Answered: Higgins currently has 2 million shares…

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

See similar textbooks

Similar questions

The firm is considering increasing its debt by $900,000, using the proceeds to buy back 90,000 shares of stock. what does buy back mean?
JL Enterprises has 90,000 shares of stock outstanding with a book value of $1,343,000 and a market value of $1,560,000. The firm is considering a project that requires the purchase of $189,000 of fixed assets and has a net present value of $7,500. The project would be all-equity financed through the sale of shares. What will the new book value per share be after the project is implemented?
Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .78. It’s considering building a new $66.8 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.93 million in perpetuity. There are three financing options: A new issue of common stock: The required return on the company’s new equity is 15.2 percent. A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.1 percent, they will sell at par. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .10. (Assume there is no difference between the pretax and aftertax accounts payable cost.) If the tax rate is 23 percent, what is the NPV of the new plant? Note: A negative answer should…
The Lopez-Portillo Company has $10.6 million in assets, 80 percent financed by debt and 20 percent financed by common stock. The interest rate on the debt is 9 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $18 million in assets. Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 12 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 40 percent. If EBIT is 9 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. Note: Round your answers to 2 decimal places. What is the degree of financial leverage under each of the three plans? Note: Round your answers to 2 decimal places. If stock could be sold at $20 per share due to increased expectations for the firm's sales and earnings, compute earnings per share for each alternative. Note: Round your answers to 2…
The Optical World Corporation, a manufacturerof peripheral vision storage systems, needs $10 million to market its new robotics-based vision systems.The firm is considering two financing options: common stock and bonds. If the firm decides to raise thecapital through issuing common stock, the flotationcosts will be 6%, and the share price will be $25. Ifthe firm decides to use debt financing, it can sell a10-year, 12% bond with a par value of $1,000. Thebond flotation costs will be 1.9%.(a) For equity financing, determine the flotationcosts and the number of shares to be sold to net$10 million.(b) For debt financing, determine the flotation costsand the number of $1,000 par value bonds tobe sold to net $10 million. What is the requiredannual interest payment?
Pettit Printing Company (PPC) has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company's EBIT is $12.68 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 65% (based on market values) or decreasing it to 35%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 9% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. PPC expects no growth in its EBIT, so gL is zero. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firm's WACC and total corporate value under each capital structure? Do not round intermediate…
Howell Corporation is interested in acquiring Burns Industries. Burns has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Burns has $8.33 million in debt that trades at par and pays a 7% interest rate. Burns’ free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Burns pays a 25% combined federal-plus-state tax rate, the same rate paid by Howell. The risk-free rate of interest is 6%, and the market risk premium is 7%. Hasting’s first step is to estimate the current intrinsic value of Burns. A. What is Burns’ cost of equity? Do not round intermediate calculations. Round to two decimal places. _______% B. What is its weighted average cost of capital? Do not round intermediate calculations. Round to two decimal places. ________% C. What is Burns’ intrinsic value of operations? Do not round intermediate calculations. Round to two decimal places.…
On January 1, 2009 the total assets of the Shipley Company were $ 180 million. During the year, the company plans to raise and invest $ 90 million. The firm's present capital structure is considered optimal.Assume that there is no short term debt. Long term debt 90,000,000 Common Equity 90, 000, 000 Total Liabilities and Equity 180,000,000 Project B Cash flow (2000) New bonds will have a coupon rate of 10% and will sell at par. Common stock, currently selling at $ 40 a share can be sold to net the company at$36 a share. Stockholders' required rate of return is 12%. (The next expected dividend is $1.60). Retained earnings are estimated to be $9 million. The tax rate is 40%. a. To maintain the present capital structure, how much of the capital budget must Shipley finance by equity? b. How much of the new equity funds needed must be generated internally?Externally? c. Calculate the cost of each of the equity components. d. Calculate the weighted average cost of capital.
Kaur Resources is an unlevered firm with a total market value of $460,000 and 10, 000 shares of stock outstanding. The firm has expected EBIT of $22, 000 if the economy is normal and $35, 000 if the economy booms. The firm is considering a bond issue of $73, 600 with an attached interest rate of 6.8 percent. The bond proceeds will be used to repurchase shares. The tax rate is 21 percent. What will be the earnings per share after the repurchase if the economy is normal? Multiple Choice $2.02 $1.70 $1.60 $2.62 $1.34

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS