is currently operating at maximum capacity. The firm has a net income of $2,250, tot assets of $24,600, long-term debt of $9,477.50, accounts payable of $2,700, dividends of $900, and total equity of $12,100. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity raised and sales are projected to increase by 5 percent? O-$467 O $367 O $0 O $108

is currently operating at maximum capacity. The firm has a net income of $2,250, tot assets of $24,600, long-term debt of $9,477.50, accounts payable of $2,700, dividends of $900, and total equity of $12,100. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity raised and sales are projected to increase by 5 percent? O-$467 O $367 O $0 O $108

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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A company’s capital structure consists solely of debt and common equity. It can issue debt at 15% interest rate, and its common stock is expected to pay a $5 dividend per share next year. The stock’s price is currently $40; its dividend is expected to grow at a constant rate of 3 percent per year; its tax rate is 30 percent and its WACC is 14 percent. Calculate the after-tax cost of debt and the cost of common equity. What percentage of the company’s capital structure consists of common equity?
Here is Icknield’s market-value balance sheet (figures in $ millions): Net working capital $550 Debt $800 long term assets $2,150 Equity $1,900 value of firm $2,700 $2,700 The debt is yielding 7%, and the cost of equity is 14%. The tax rate is 21%. Investors expect this level of debt to be permanent. a. What is Icknield’s WACC? b. How would the market-value balance sheet change if Icknield retired all its debt?
In year 1, AMC will earn $2,900 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 45%. Right now, the firm has $7,250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.7% per year. Suppose the risk-free rate equals 4.5%, and the expected return on the market equals 9.9%. The asset beta for this industry is 1.93. Using the WACC, the expected return for AMC equity is 25.71%. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow using the FTE method? (Hold all intermediate calculations to at least 6 decimal places and round to the…
ces NoNuns Companies has a 21 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 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 Probability of state Expected EBIT in state Recession 0.25 $ 5 million EBIT Average 0.55 $ 10 million Boom 0.20 $ 17 million The firm is considering switching to a 20-percent-debt capital structure, and has determined that it would have to pay an 8 percent yield on perpetual debt in either event. What will be the break-even level of EBIT? Note: Round intermediate calculations. Enter your answer in dollars not millions and round your final answer to the nearest whole dollar amount.
Wham Corp. is financed entirely by equity at the cost of 12%. The firm is expected to generate a level, perpetual stream of earnings of $1,000 per year. It operates in a perfect market except for taxation at the rate of 40%. (a) Compute the net cash flow per year and the value of the unlevered firm. (b) Now assume the firm borrows $3,000 at a debt cost of 8%. (c) Compute the value of the levered firm and account for the difference in your answer for the unlevered firm.
A firm has Sales of $25,000,000, total assets of $22,000,000, current assets of $8,000,000, spontaneous liabilities of $5,000,000, a profit margin of 5 percent, a tax rate of 40%, and a dividend payout rate of 20 percent. Sales are expected to increase to $28,000,000 for the coming year, and the firm will need to increase its fixed assets at this level of sales (that is, fixed assets will increase proportionately with sales). Given this information, and using the equation approach, determine the additional funds needed for the coming year. O $950,000 O $1.010,000 Ⓒ$920.000 $980,000 O $1,040,000
Manshuk
Need all three parts
An investment centre has reported net operating profits after tax of sh.24 million. Taxation is paid at the rate of 25 per cent of the operating profit. The company has a risk adjusted weighted average cost of capital of 12 per cent per annum and is paying interest at 9 per cent per annum on a substantial long term loan. The investment centre's non-current asset value is sh.11 million and the net current assets have a value of sh.22 million. What is the Economic Value Added (EVA) for the period? Select one: A. 6.32M B. 8.32M C. 7.32M D. None of the above
you have developed the following pro forma income statement for your? corporation: it represents the most recent? year’s operations, which ended yesterday. a.if sales should increase by 25 ?percent, by what percent would earnings before interest and taxes and net income? increase? b.if sales should decrease by 25 ?percent, by what percent would earnings before interest and taxes and net income? decrease? q c.if the firm were to reduce its reliance on debt financing such that interest expense were cut in? half, how would this affect your answers to parts a and b?? sales $ 45,750,000 variable costs -22,800,000 revenue before fixed costs $ 22,950,000 fixed costs -9,200,000 ebit $ 13,750,000 interest expense -1,350,000 earnings before taxes $ 12,400,000 taxes (50%) -6,200,000 net income $ 6,200,000
Bhupat bhai
Target Corporation (TGT) has $2.14 million in assets that are currently financed with 100% equity. TGT’s EBIT is $385,000, and its tax rate is 25%. If TGT changes its capital structure to include 50% debt, its return on equity will increase. Assume the interest rate on debt is free. (justify your answer with numerical calculation) True False

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