Answered: king Inc. is expected to generate EBIT…

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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Blooming Ltd. currently has the following capital structure: Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years. Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely. Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%. Company tax rate is 30%. Required: Complete the following tasks: Calculate the current market value (rounded off to the nearest whole number) and capital structure of the firm (rounded off to two decimal places). Identify the total weights of equity funding (2 marks) Compute the weighted average cost of capital (WACC) under the traditional tax system for the firm, using…
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?
Blooming Ltd. currently has the following capital structure: Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years. Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely. Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%. Company tax rate is 30%. Required: Complete the following tasks: Calculate the current price of the corporate bond? Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%? Calculate the current value of the preferred share if the average return of the shares in the same industry is 12% Calculate the current market…

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