Question 5 CCC Corp has $725, 500 of assets and it uses no debt - it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to asset ratio to 42%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? a. $419,680 b. $ 392,160 c. $268,320 d. $350, 880 e. $304, 710

Question 5 CCC Corp has $725, 500 of assets and it uses no debt - it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to asset ratio to 42%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? a. $419,680 b. $ 392,160 c. $268,320 d. $350, 880 e. $304, 710

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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Question#01 The Rogers Company is currently in this situation: Sales = 14 million; Variable Cost = 7 million Fixed Cost = 3 million tax rate, T = 35%; value of debt, D = $2 million; k d = 10%; ks = 15%; and Shares of stock outstanding, n = 600,000. The firm’s market is stable, and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. What is the total market value of the firm’s stock, S, its price per share, P0, and the firm’s total market value, V? What is the firm’s weighted average cost of capital? The firm can increase its debt by $8 million, to a total of $10 million, using the new debt to buy back and retire some of its shares. Its interest rate on all debt will be 12 percent (it will have to call and refund the old debt), and its cost of equity will rise from 15 to 17 percent. EBIT will remain constant. Should the firm change its capital structure? Calculate the Break-even point of the company.
Q.An all-equity company that has a current value $300,000 is considering borrowing $60,000 and using the borrowed funds to repurchase shares. The company can borrow at 5%. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied except the corporate tax rate is 35%, and investors are subject to an 18% tax rate on equity income and a 25% tax rate on debt income. If the company proceeds with the capital restructuring, what will be the value of the company according to M&M Proposition I with personal and corporate taxes?
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QUESTION 5 You are Chief Financial Officer of the ABC Corporation. ABC has two divisions, one of which is retail, and the other is manufacturing. ABC's debt-equity ratio (measured at market value) is one half. The company has $2.5 billion in face value of perpetual bonds which pay an annual coupon of 4% and have a yield to maturity of 10%. ABC's equity has a beta of 1.25. The company faces a 35% tax rate. The risk-free rate of return is 5.6% and the market risk premium, over and above the risk-free rate, is 8%. The company is considering a business expansion in the retail industry. The expansion project will generate $20 million free cash flow per year indefinitely. ABC is planning to maintain the industry average leverage ratio for the expansion project. Companies that operate purely in the manufacturing industry have an average beta of 0.8 and an average debt-equity ratio (measured at market value) of three quarter. Companies that operate purely in the retail industry have an average…
7.
ings Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £60m of debt on which it pays a 5% interest rate. Assume no transaction costs, no taxes and risk-free debt. The relevant numbers are provided in the following table (in £ m): A Value of Firm 100 120 Debt 60 Equity 100 60 Projected earnings before interest 12 12 Interest payment Not Interest rate 5% Applicable Please fill in the following statements a) A's return on equity is equal to b) B's return on equity is equal to C) A's weighted average cost of capital is equal to Shot on vivoZverage cost of capital is equal to WIDE Vivo Al camera Please answer the following questions
6
Capital Structure Analysis The Rivoli Company has no debt outstanding, and its financial position is given by the following data: $ 45 6 ✔ Expected EBIT Growth rate in EBIT, gL Cost of equity, rs Shares outstanding, no Tax rate, T (federal-plus-state) a. What is Rivoli's intrinsic value of operations (i.e., its unlevered value)? Round your answer to the nearest dollar. 4500000✔✔ $ What is its intrinsic stock price? Its earnings per share? Round your answers to the nearest cent. Intrinsic stock price: $ Earnings per share: $ 4.50 b. Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 35% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 8%. Based on the new capital structure, what is the new weighted average cost of capital? Round your answer to three decimal places. 9.9 % What is the levered value of the firm? What is the…
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QUESTION 2 Pipe Ltd is a totally equity-financed company with a value of R200 000,00. Management wants to introduce a 30% debt in the capital structure without altering the total amount of financing required (R200 000,00). Pipe Ltd’s shares are trading at R10,00 per share and the company pays all its earnings as dividends. The details of the new 30% debt ratio are listed below: Debt ratio 30% EBIT R100 000 Interest rate 11.5% Required return 14% Tax rate 28% Based on earnings per share, advise management whether they must introduce the 30% debt or retain the totally equity financed capital structure.

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