Ornaments, Incorporated, is an all-equity firm with a total market value of $652,000 and 31,700 shares of stock outstanding. Management believes theearnings before interest and taxes (EBIT) will be $93,400 if the economy is normal. If there is a recession, EBIT will be 20 percent lower, and if there is aboom, EBIT will be 30 percent higher. The tax rate is 23 percent. What is the EPS in a recession? O$181$2.12$2.30$1,24$1.77

Investors and financial analysts can compare the financial performance of companies using EPS, which…

Answered: Ornaments, Incorporated, is an…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $204,000 per year. The cost of equity is 14.5 percent and the tax rate is 39 percent. The firm can borrow perpetual debt at 5.6 percent. Currently, the firm is considering converting to a debt–equity ratio of 1.14. What is the firm's levered value?
The Montana Hills Co. has expected earnings before interest and taxes of $17,100 forever, an unlevered cost of capital of 12.4 percent, and debt with both a book and face value of $25,000. The debt has an annual 6.2 percent coupon. If the tax rate is 21 percent, what is the value of the firm? $91,016 $137,903 $114,194 $106,667 $146,403
You are considering two identical firms one levered the other not. Both firms have expected EBIT of $600. The value of the unlevered firm (vU) is $2000. The corporate tax rate (t) is 30%. The cost of debt (rD) is 10%, and the ratio of debt to equity (D/E) is 1 for the levered firm. (a) Calculate the cost of equity for both the levered (rL) and unlevered firms (rU). (b) Calculate the weighted average cost of capital for each firm. (c) Why is the cost of equity higher for the levered firm, but the WACC lower? (d) In an MM world without taxes, what is the optimal capital structure?
The firm is financed with debt and equity. The book value of the debt is $10,000,000; the book value of the equity is $30,000,000. The stockholders require an 10.1% return. If the required return on the firm’s debt is 4% and the firm’s tax rate is 20%, what is the firm’s weighted average cost of capital (WACC)?
A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has sales of $2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000. If the firm's before-tax cost of debt is 10 percent and the firm's tax rate is 40 percent, what is the firm's ROE?
An all-equity firm that has projected perpetual EBIT of $204,000 per year. The cost of equity is 14.5 percent and the tax rate is 39 percent. The firm can borrow perpetual debt at 5.6 percent. Currently, the firm is considering taking on debt equal to 114 percent of its unlevered value. What is the firm's levered value? $772,386 $858,207 $1,335,132 $1,048,986 $1,239,766
You expect that Tin Roof will generate a perpetual stream of EBIT at $92,000 annually. The firm's cost of debt is about 6.2 percent based on before tax YTMS. The firm's cost of equity is 11.4 percent based on CAPM. What is the value of the firm (in whole dollar) if corporate tax rate is 20 percent and the firm is financed with 40 percent debt and 60 percent equity? $819,623 $856,141 $834,088 $895,941 $861,439
Start-Up Industries is a new firm that has raised $400 million by selling shares of stock Management plans to earn a 20% rate of return on equity, which is more than the 12% rate of return available on comparable-risk investments. Half of all earnings will be reinvested in the firm. B. What will be Start-Up's ratio of market value to book value? Note: Do not round intermediate calculations. Market-to-book ratio b. What will be Start-Up's ratio of market value to book value if the firm can earn only a rate of return of 8% on its investments? Note: Do not round intermediate calculations. Round your answer to 1 decimal place. Market-to-book ratio
Your firm has a WACC of 16.25%. The cost of equity is 20% and the firm's bonds yield 7.9%. The tax rate is 30%. What is the firm's D/E ratio?
Now, take the same firm, but put it in an environment where there is a 28% tax rate. h. What is the value of the unleveraged firm in the world with taxes and what will be the price of each equity share? i. Calculate each of the following for the unleveraged firm: ROA ROE • EPS • Cost of Equity (Rs) WACC Now add the $140 million in perpetual debt. j. What is the value of the leveraged firm in the world with taxes and what will be the price of each equity share? k. How many shares will be left outstanding after the change in capital structure this time 1. Calculate each of the following for the leveraged firm: • ROA ROE • EPS • Cost of Equity WACC m. Using Rs & Rb and the relevant annual CF to equity and debt, calculate the value of the Equity (S), the value of debt (B), and the value of the firm (V). n. Using WACC and the relevant annual CF to the firm, calculate the value of the firm (V).
An all -equity firm reports a net profit margin of 12% on sales of $6 million. If the tax rate is 35%, what is the pretax profit?
44) Vapor Lock Motors’ EBIT is $7,000,000, the company’s interest expense is $2,000,000, and its tax rate is 40 percent. Vapor Lock’s beta is 1.5 a. What is Vapor Lock’s DFL? b. If Vapor Lock were able to grow its EBIT by 50%, what would be the percentage increase in net income? c. If Vapor Lock were able to grow its EBIT by 50%, what would be the resulting net income?

SEE MORE QUESTIONS

Recommended textbooks for you

FINANCIAL ACCOUNTING

Accounting

ISBN:

9781259964947

Author:

Libby

Publisher:

MCG

Accounting

ISBN:

9781337272094

Author:

WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.

Publisher:

Cengage Learning,

Accounting Information Systems

Accounting

ISBN:

9781337619202

Author:

Hall, James A.

Publisher:

Cengage Learning,

FINANCIAL ACCOUNTING

Accounting

ISBN:

9781259964947

Author:

Libby

Publisher:

MCG

Accounting

ISBN:

9781337272094

Author:

WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.

Publisher:

Cengage Learning,

Accounting Information Systems

Accounting

ISBN:

9781337619202

Author:

Hall, James A.

Publisher:

Cengage Learning,

Horngren's Cost Accounting: A Managerial Emphasis…

Accounting

ISBN:

9780134475585

Author:

Srikant M. Datar, Madhav V. Rajan

Publisher:

PEARSON

Intermediate Accounting

Accounting

ISBN:

9781259722660

Author:

J. David Spiceland, Mark W. Nelson, Wayne M Thomas

Publisher:

McGraw-Hill Education

Financial and Managerial Accounting

Accounting

ISBN:

9781259726705

Author:

John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS

Ornaments, Incorporated, is an all-equity firm with a total market value of $ earnings before interest and taxes (EBIT) will be $93,400 if the economy is boom, EBIT will be 30 percent higher. The tax rate is 23 percent. What is the