### River Cruises Financial Analysis **Overview**River Cruises is an all-equity-financed company as per the current data provided. The table below details the number of shares, share price, market value of shares, and profits before interest under different states of the economy.**Current Data**| Item | Value ||---------------------------|------------------|| Number of shares | 100,000 || Price per share | $10 || Market value of shares | $1,000,000 || | || **Outcomes** | **State of the Economy** || | Slump | Normal | Boom || Profits before interest | $82,750 | $140,500| $202,000 |**Scenario Analysis**River Cruises now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. The assumption is made that the firm pays no taxes and that debt finance has no impact on firm value. Below is a table to compute the missing data. Intermediate calculations are not rounded. "Earnings per share" are rounded to three decimal places and "Return on shares" to two decimal places.**Data to Compute**| Item | Value ||---------------------------|------------------------|| Number of shares | || Price per share | $10 || Market value of shares | || Market value of debt | || | || **Outcomes** | **State of the Economy** || | Slump | Normal | Boom || Profits before interest | $82,750 | $140,500| $202,000 || Interest | ________ | ________ | ________ || Equity earnings | ________ | ________ | ________ || Earnings per share | ________ | ________ | ________ || Return on shares | ________% | ________%| ________% || Expected Outcome | | | |Would you like to proceed with computations for the above-mentioned data?

Calculation of EPS and Return on shares: Excel spreadsheet:

River Cruises is all-equity-financed. Current Data Number of shares 100,000 $ $1,000,000 Outcomes Price per share Market value of shares 10 State of the Economy Slump Normal Вoom Profits before interest $ 82,750 $ 140,500 $ 202,000 Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.) Data Number of shares Price per share Market value of shares Market value of debt 10 Outcomes State of the Economy Slump Normal Вoom Profits before interest $ 82,750 140,500 202,000 Interest Equity earnings Earnings per share Return on shares % % Expected Outcome

River Cruises is all-equity-financed. Current Data Number of shares 100,000 $ $1,000,000 Outcomes Price per share Market value of shares 10 State of the Economy Slump Normal Вoom Profits before interest $ 82,750 $ 140,500 $ 202,000 Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.) Data Number of shares Price per share Market value of shares Market value of debt 10 Outcomes State of the Economy Slump Normal Вoom Profits before interest $ 82,750 140,500 202,000 Interest Equity earnings Earnings per share Return on shares % % Expected Outcome

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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Access to the financial market is challenging. SEF Corporation is considering a new debt-equity mix to save on cost of funds. The following capital structure is given for the company: Bonds, 7% Preferred Stock, P50 Common Stock Retained Earnings P 3,000,000 2,400,000 3,600,000 3,000,000 P12,000,000 Dividends on common stock are currently at P30 per share and are expected to grow at a constant rate of 6 percent. Market price per share of common stock is P400, and the preferred stock is selling at P500. Flotation cost on new issues of common stock is 10 percent. The interest on bonds is paid annually. The company's tax rate is 40 percent. Calculate the following: (a) The cost of debt (b) The cost of preferred stock (c) The cost of retained earnings (internal equity) (d) The cost of new common stock (external equity) (e) The weighted average cost of capital considering all four sources of funds What is the least costly capital structure for the company? Explain.
A company is an all-equity firm that has projected earnings before interest and taxes, $490,000, forever The current cost of equity is 16% and the tax rate is 21%. The company is in the process of issuing $1,000,000 of bonds at par that carry a 6% annual coupon. What is the levered value of the firm? O a. $2,424,125 O b. $2,363,849 O c. $2,142,793 O d. $2,629,375
Use the following information: • Debt: $68,000,000 book value outstanding. The debt is trading at 89% of book value. The yield to maturity is 11%. Equity: 1,800,000 shares selling at $35 per share. Assume the expected rate of return on Federated's stock is 20%. Taxes: Federated's marginal tax rate is Te 0.21. Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 16.75% (D/V= 0.1675). The pre-tax cost of debt has dropped to 10.6%. The company's business risk, opportunity cost of capital, and tax rate have not changed. Use the three-step procedure to calculate Federated's WACC under these new assumptions. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Weighted-average cost of capital %
Appliances, Inc. has no debt outstanding, and its financial position is given by the following data: Assets (market value = book value) $5,000,000 EBIT $800,000 Cost of equity 12% Stock price $10 Shares outstanding 500,000 Tax rate 25% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 20% debt based on market values, its cost of equity will increase to 13% to reflect the increased risk. Bonds can be sold at a cost of 6%. Appliance, Inc. is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time. As a creditor, you are concerned about the company’s ability to repay its debt and interest. What is the new times interest earned?
n Tina Black's Fabrics is currently an all equity firm that has 15,000 shares of stock outstanding at a market price of $12.50 a share. Company management has decided to issue $60,000 worth of debt and use the funds to repurchase shares of the outstanding stock at the market price. The interest rate on the debt will be 7%. Ignoring taxes, what is the earnings per share (EPS) at the break-even level of earnings before interest and taxes (EBIT)? O A. O B. O D. $1.143 O C. $1.500 SOE. $1.125 $0.875 $0.667 27/
7.
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Consider the following information for Abracadabra of America . Debt $84,000,000 book value outstanding The debt is trading at 86% of book value. The yield to maturity is 7% . Equity: 3.400,000 shares selling at $51 per share. Assume the expected rate of return on Abracadabra's stock is 16% . Taxes: Abracadabra's marginal tax rate is T0.21. You want to include financing in your valuation decision. Calculate the rate that you would use (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) answer
Debt: $69,000,000 book value outstanding. The debt is trading at 95% of book value. The yield to maturity is 10%. Equity: 1,900,000 shares selling at $36 per share. Assume the expected rate of return on Federated's stock is 19%. • Taxes: Federated's marginal tax rate is T_{c} = 0.21 . Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 16.50% (D/V= 0.1650). The pre-tax cost of debt has dropped to 9.6%. The company's business risk, opportunity cost of capital, and tax rate have not changed. Use the three-step procedure to calculate Federated's WACC under these new assumptions.
VanMannen Foundations, Inc. (VF)VanMannen Foundations, Inc. (VF) is a zero-growth company that currently has zero debt, and it has the data shown below. EBIT = $80,000 Growth = 0% Orig cost of equity, rs = 10.0% No. of shares = 10,000 Price per share = $60.00 Tax rate = 25% Refer to the data for VanMannen Foundations, Inc. (VF). Now the company is considering using some debt, moving to the market value capital structure indicated below. The money raised would be used to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, what would be VF's new WACC and its new value of operations? New interest rate = rd = 6.00% New cost of equity = rs = 10.75% New Debt/Value = wd = 20% New Equity/Value = ws = 80% Whic one is correct? WACC Value a. 10.10%…
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