Problem 16-5 MM and Stock Value Foundation Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 195,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $2.35 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes. a. Use MM Proposition I to find the price per share. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) Answer is complete but not entirely correct. a. Share price 36.15 b. All-equity plan b. Levered plan 24 7,049,250 8 7,049,500

Problem 16-5 MM and Stock Value Foundation Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 195,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $2.35 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes. a. Use MM Proposition I to find the price per share. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) Answer is complete but not entirely correct. a. Share price 36.15 b. All-equity plan b. Levered plan 24 7,049,250 8 7,049,500

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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14-What is the weighted average cost of capital for the firm with equal weights of debt and equity financing? Assuming that the cost of equity capital at 15%, before tax cost of debt at 12%, and a 35% tax rate. a. 8.775% b. 13.50% c. 9.60% d. 11.40%
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A5 6c DEF Company is comparing three different capital structures. Plan A is an all-equity plan and would result in 1000 shares of stock. Plan B would result in 700 shares of stock and $13,500 in debt. Plan C would result in 800 shares of stock and $9000 in debt. The firm’s EBIT will be $10,000 per year until infinity. The interest rate on the debt is 12%. c. Compute the break-even EBIT that will cause the EPS on Plan C to be equal to the all-equity EPS (Plan A).
33-Marhaba Company’s capital structure consists entirely of long-term debt and equity. The cost of capital for each component is shown as – before tax cost of debt (kd) 8% and cost of equity (ke) 15%. The proportion of capital for each component is Debt 40% and Equity 60%. What would be weighted average cost of capital of the company? Assume that the corporate tax rate is at 40%. a. 10.92% b. 12.2% c. 10.41% d. 8.88% Clear my choice
Problem 22-10 The financial manager has determined the following schedules for the cost of funds: Cost of Debt Debt ratio 0% 10 20 30 40 50 60 Assets 4 4 $400 Assets 4 4 5 a. Determine the firm's optimal capital structure. Round your answer to two decimal places. The optimal capital structure consists of -Select- % debt resulting in the cost of capital equal to 7 b. Construct a simple pro forma balance sheet that shows the firm's optimal combination of debt and equity for its current level of assets. Round your answers to the nearest dollar.. Balance Sheet Cost of Equity 11%) 11 11 11 12 13 14 Debt Equity %. $ 400 c. An investment costs $500 and offers annual cash inflows of $186 for four years. Should the firm make the investment? Use Appendix D to answer the question. Round your answer to the nearest whole number.. The Investment -Select- be made since the internal rate of return that is % -Select- o the cost of capital. d. If the firm makes this additional investment, how should its…
19
Module 6 Question 2 (Individual or component costs of capital) Compute the cost of capital for the firm for the following: a. Currently bonds with a similar credit rating and maturity as the firm's outstanding debt are selling to yield 8.00 percent while the borrowing firm's corporate tax rate is 34 percent. b. Common stock for a firm that paid a $1.05 dividend last year. The dividends are expected to grow at a rate of 5.0 percent per year into the foreseeable future. The price of this stock is now $25.00. c. A bond that has a $1,000 par value and a coupon interest rate of 12.0 percent with interest paid semiannually. A new issue would sell for $1,150 per bond and mature in 20 years. The firm's tax rate is 34 percent. d. A preferred stock paying a dividend of 7.0 percent on a $100 par value. If a new issue is offered, the shares would sell for $85.00 per share. a. The after-tax cost of debt debt for the firm is ________%.

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