The Hassan Corporation has an electric mixer division and an electric lamp division. Of a $23,550,000 bond issuance, the electric mixer division used $15,350,000 and the electric lamp division used $8,200,000 for expansion. Interest costs on the bond totaled $1,930,000 for the year. Which corporate costs should be allocated to divisions?
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- Solve this QuestionHii Tutor Give Answer this problemCompanies U and L are identical in every respect except that U is unlevered while L has $20 million of 8% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 12%. What value would MM now estimate for each firm? Company U:Company L:
- Consider each of the following separate situations that arose in 20X1: a. Corporation G invested $71,000 in corporate bonds as a short-term investment. The year-end 20X1 market value of the bonds is $63,500. The bonds are measured at fair value every reporting date in FVTPL. b. Corporation A has the equivalent of C$ 201,000 cash in a bank in Elbonia. Elbonia's laws prohibit transferring the cash to the Canadian parent company. Corporation A has ongoing operations in Elbonia and uses the cash to run their operations in that country. c. Corporation B received $85,500 from a customer as advance payment for a specialized piece of manufacturing equipment that is anticipated to be delivered in 20X3. d. Corporation C has $810,000 in notes receivable from customers. The notes mature over a two-year period. The company normally sells its products on an instalment basis that requires payments over two years. e. Corporation D received an advance payment of $50,500 for an event that will be held…Companies U and L are identical in every respect except that U is unlevered while L has $20 million of 8% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 12%. What is rs for Firm U?Companies U and L are identical in every respect except that U is unlevered while L has $20 million of 8% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 12%. What is the WACC for Firm U? % What is the WACC for Firm L? %
- Dark Creek Corporation's CEO is selecting between two mutually exclusive projects. The company is obligated to make a $3,700 payment to bondholders at the end of the year. To minimize agency cost, the firm's bondholders decide to use a bond covenant to stipulate that the bondholders can demand an additional payment if the company chooses to take on the high-volatility project. How much additional payment to bondholders would make stockholders indifferent between the two projects? Cash flows pertaining to the two projects are shown in the table below. Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff $2,900 $4,000 4,800 Bad 40 Good .60 6,300 O $1366.67 O $1166.67 O $1300.00 O $1233,33Contractual Engineering Incorporated (GEI) has a capital structure which is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pre-tax cost of debt is 7.5 percent, the cost of preferred is 9 percent, and the cost of common stock is 13 percent. The company's tax rate is 39 percent. What is the company's WACC?Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $26 million in invested capital, has $3.9 million of EBIT, and is in the 25% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places.ROIC for firm LL: %ROIC for firm HL: % Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places.ROE for firm LL: %ROE for firm HL: % Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 25% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer…
- Thrillville has $41 million in bonds payable. One of the contractual agreements in the bond is that the debt to equity ratio cannot exceed 2.0. Thrillville’s total assets are $81 million, and its liabilities other than the bonds payable are $11 million. The company is considering some additional financing through leasing.Required:1. Calculate total stockholders’ equity using the balance sheet equation.2. Calculate the debt to equity ratio.3. The company enters a lease agreement requiring lease payments with a present value of $16 million. Record the lease.4. Will entering into the lease cause the debt to equity ratio to be in violation of the contractual agreement in the bond? Determine your answer by calculating the debt to equity ratio after recording the lease.Firms HL and LL are identical except for their financialleverage ratios and the interest rates they pay on debt. Each has $20 million in investedcapital, has $4 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL,however, has a debt-to-capital ratio of 50% and pays 12% interest on its debt, whereas LLhas a 30% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm usespreferred stock in its capital structure.a. Calculate the return on invested capital (ROIC) for each firm.b. Calculate the return on equity (ROE) for each firm. c. Observing that HL has a higher ROE, LL’s treasurer is thinking of raising the debt-to-capital ratio from 30% to 60% even though that would increase LL’s interest rate on all debt to 15%. Calculate the new ROE for LL.Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $10 million in invested capital, has $1.5 million of EBIT, and is in the 25% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 11% interest on its debt, whereas LL has a 30%-debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure. a. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places. ROIC for firm LL: ROIC for firm HL: % % b. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LL: ROE for firm HL: % % c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 30% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer to two…