Financial Accounting Question Solution Please Saturn Corp. has $312,900 of assets, and ituses only common equity capital (zero debt).Its sales for the last year were $620,000, andits net income after taxes was $24,655.Stockholders recently voted in a newmanagement team that has promised to lowercosts and get the return on equity up to 15%.What profit margin would the company needin order to achieve the 15% ROE, holdingeverything else constant?

Step 1: Define Return on EquityReturn on equity is computed to evaluate the profitability of an…

Answered: Saturn Corp. has $312,900 of assets,…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

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Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $550,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? Do not round your intermediate calculations. a. 10.13% b. 10.64% c. 10.23% d. 8.59% e. 9.92%
Sunland Inc.’s common shares currently sell for $35 each. The firm’s management believes that its shares should really sell for $42 each. The firm just paid an annual dividend of $2 per share and management expects those dividends to increase by 5 percent per year forever (and this is common knowledge to the market). - What does management believe is the correct cost of common equity for the firm?
Burger Corp has $500,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $600,000, and its net income after taxes was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would Burger need in order to achieve the 15% ROE, holding everything else constant?
As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 80.0% debt would cause the cost of equity to increase from 10.0% to 14.0%, and the interest rate on the new debt would be 9.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is needed, and then divide by (WACC - g). Do not round your intermediate calculations. Oper. income (EBIT) $800 Tax rate 25.0% New cost of equity (rs) 14.00% New wd 80.0% Interest rate (rd) 9.00% $5,854 $4,917 $6,205 $7,317 $5,561
13. Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant?
Sunland Inc.’s common shares currently sell for $35 each. The firm’s management believes that its shares should really sell for $42 each. The firm just paid an annual dividend of $2 per share and management expects those dividends to increase by 5 percent per year forever (and this is common knowledge to the market). - What is the current cost of common equity for the firm?
Currently, Dividend Airlines is an unlevered firm and expects to generate $330 free cash flow each year in perpetuity. Its corporate tax rate is 37%. The firm is considering a capital structure to allow $361 of debt. The debt is assumed to be rolled over when it matures with the same amount of principal. Its cost of debt capital is 15%. Similar unlevered firms in the same industry have a cost of equity capital of 28%. Assume no agency costs nor default risk. What will the value of Dividend Airlines be after the change of capital structure?
Target Corporation (TGT) has $2.14 million in assets that are currently financed with 100% equity. TGT’s EBIT is $385,000, and its tax rate is 25%. If TGT changes its capital structure to include 50% debt, its return on equity will increase. Assume the interest rate on debt is free. (justify your answer with numerical calculation) True False
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A firm has no debt outstanding and a total market value of $938,080. Earnings before interest and taxes, EBIT, are projected to be $118, 600. The company is considering a $205,920 debt issue with an interest rate of 8.25%. The proceeds will be used to repurchase 7200 shares of stock. There are currently 32,800 shares outstanding. Ignore taxes for this problem. What is the EPS on the firm after the additional debt is taken on? A) 3.62 B) 4.56 C) 3.10 D) 3.97 E) 4.37
Jericho Snacks is an all-equity firm with estimated earnings before interest and taxes of $826,000 annually forever. Currently, the firm has no debt but is considering borrowing $650,000 at 6.75 percent interest. The tax rate is 34 percent and the current cost of equity is 17.2 percent. What is the value of the levered firm? $3,187,271 $3,169,535 $3,307,271 $3,390,535 $3,506,418

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