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- 1.10 Norwell Inc. has equity with a market value of $900 million and a current debt to capital ratio of 10%. If Norwell has an optimal debt ratio of 40% and would like to borrow money and buy back stock right now, how much additional debt will the firm have to issue? a. $260 million b. $300 million c. $400 million d. $600 million e. None of the aboveConsider a simple firm that has the following market-value balance sheet: Assets Liabilities & Equity Debt Equity $1,030 $410 620 Next year, there are two possible values for its assets, each equally likely: $1,190 and $970. Its debt will be due with 5.1% interest. Because all of the cash flows from the assets must go either to the debt or the equity, if you hold a portfolio invested 40% in the firm's debt and 60% in its portfolio of the debt and equity in the same proportions as the firm's capital structure, your portfolio should earn exactly the expected return on the firm's assets. Show that equity will have the same expected return as the assets of the firm. That is, show that the firm's WACCi the same as the expected return on its assets. If the assets will be worth $1,190 in one year, the expected return on assets will be %. (Round to one decimal place.) If the assets will be worth $970 in one year, the expected return on assets will be %. (Round to one decimal place.) The…Q.A company will earn net profits of $100,000 if the economy booms (probability of 80%) and net profits of $60,000 if the economy enters a recession (probability of 20%). The company wants to take out a loan for $74,000 to finance its operations.Treasuries of the same maturity offer an interest rate of 6%. Assume risk neutrality. A)What payoff would the bank receive if it invested $74,000 in Treasuries? B)What payout should the bank be looking for during the boom (in $)? C)What interest rate should the bank quote?
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- Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return. Current Proposed Assets $10,000 $18,000 Debt $0 $8,000 Equity $10,000 $10,000 Debt/Equity ratio 0.00 1.00 Interest rate n/a 7% Shares outstanding 500 500 Share price $20 $20 (b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued.Consider a simple firm that has the following market-value balance sheet: Assets Liabilities & Equity $1,000 Debt $400 Equity 600 Next year, there are two possible values for its assets, each equally likely: $1,200 and $960. Its debt will be due with 5.0% interest. Because all of the cash flows from the assets must go either to the debt or the equity, if you hold a portfolio of the debt and equity in the same proportions as the firm's capital structure, your portfolio should earn exactly the expected return on the firm's assets. Show that a portfolio invested 40% in the firm's debt and 60% in its equity will have the same expected return as the assets of the firm. That is, show that the firm's WACC is the same as the expected return on its assets. If the assets will be worth $1,200 in one year, the expected return on assets will be %. (Round to one decimal place.) If the assets will be worth $960 in one year, the expected return on assets will be %. (Round to one decimal place.) The…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.