The Veblen Company and the Knight Company are identical in every respect except that Veblen is not levered. The market value of Knight Company's 5 percent bonds is $2.00 million. Financial information for the two firms appears here. All earnings streams are perpetuities. Neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately. Firms and individuals can borrow and lend at the same rate. Projected operating income Year-end interest on debt Market value of stock Market value of debt Veblen $ 1,200,000 4,500,000 Knight $1,200,000 100,000 O Investor should invest in Knight because strategy 1) gives larger annual payoff. O Investor should invest in Knight because strategy 2) gives larger annual payoff. O Investor should invest in Veblen because strategy 2) gives larger annual payoff. O Investor should invest in Veblen because strategy 1) gives larger annual payoff. 2,250,000 2,000,000 Compare two trading strategies: 1) purchase 5% of Knight's equity; 2) purchase 5% of Veblen's equity on margin so that the investment in each company is equal. Which of the following is true?

The Veblen Company and the Knight Company are identical in every respect except that Veblen is not levered. The market value of Knight Company's 5 percent bonds is $2.00 million. Financial information for the two firms appears here. All earnings streams are perpetuities. Neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately. Firms and individuals can borrow and lend at the same rate. Projected operating income Year-end interest on debt Market value of stock Market value of debt Veblen $ 1,200,000 4,500,000 Knight $1,200,000 100,000 O Investor should invest in Knight because strategy 1) gives larger annual payoff. O Investor should invest in Knight because strategy 2) gives larger annual payoff. O Investor should invest in Veblen because strategy 2) gives larger annual payoff. O Investor should invest in Veblen because strategy 1) gives larger annual payoff. 2,250,000 2,000,000 Compare two trading strategies: 1) purchase 5% of Knight's equity; 2) purchase 5% of Veblen's equity on margin so that the investment in each company is equal. Which of the following is true?

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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Which of the following choices best describes reasonable conclusions that you might make about the two companies’ ability to pay their current and long-term obligations? A. Company A’s current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, and Company A is also more solvent, as indicated by a debt-to-equity ratio of 200 percent compared with Company B’s debt-to-equity ratio of only 30 percent. B. Company A’s current ratio of 0.25 indicates it is less liquid than Company B, whose current ratio is 0.83, and Company A is also less solvent, as indicated by a debt-to-equity ratio of 200 percent compared with Company B’s debt-to-equity ratio of only 30 percent. C. Company A’s current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, but Company B is more solvent, as indicated by its lower debt-to- equity ratio.
ABC and XYZ are identical firms in all respects except for their capital structures. ABC is all-equity financed with $530,000 in stock. XYZ has the same total value but uses both stock and perpetual debt; its stock is worth $310,000 and the interest rate on its debt is 7.9 percent. Both firms expect EBIT to be $62,222. Ignore taxes. Compute the costs of equity for both ABC and XYZ.
An investment bank agrees to underwrite an issue of 15 million shares of stock for Looney Landscaping Corporation. a. The investment bank underwrites the stock on a firm commitment basis, and agrees to pay $10.00 per share to Looney Landscaping Corporation for the 15 million shares of stock. The investment bank then sells those shares to the public for $11.50 per share. How much money does Looney Landscaping Corporation receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $8.50, how much money does Looney Landscaping Corporation receive? What is the profit to the investment bank? b. Suppose, instead, that the investment bank agrees to underwrite the 15 million shares on a best efforts basis. The investment bank is able to sell 13.5 million shares for $10.00 per share, and it charges Looney Landscaping Corporation $0.325 per share sold. How much money does Looney Landscaping Corporation receive? What is the profit to the investment…
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structures. ABC is all-equity financed with $575,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $287,500 and the interest rate on its debt is 8.5 percent. Both firms expect EBIT to be $64,000. Ignore taxes. a. Richard owns $34,500 worth of XYZ's stock. What rate of return is he expecting? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. Suppose Richard invests in ABC Co. and uses homemade leverage to match his cash flow in part (a). Calculate his total cash flow and rate of return. (Enter your return answer as a percent. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c. What is the cost of equity for ABC and XYZ? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g ., 32.16.) d. What is the WACC for ABC…
Edwards Construction currently has debt outstanding with a market value of $116,000 and a cost of 12 percent. The company has EBIT of $13,920 that is expected to continue in perpetuity. Assume there are no taxes. a-1. What is the value of the company's equity? (Do not round intermediate calculations. Leave no cell blank - be certain to enter "0" wherever required.) a- What is the debt-to-value ratio? (Do not round intermediate calculations and round 2. your answer to the nearest whole number, e.g., 32.) b. What are the equity value and debt-to-value ratio if the company's growth rate is 5 percent? (Do not round intermediate calculations and round your "Debt-to- value" answer to 3 decimal places, e.g., 32.161.) c. What are the equity value and debt-to-value ratio if the company's growth rate is 8 percent? (Do not round intermediate calculations and round your "Debt-to- value" answer to 3 decimal places, e.g., 32.161.) Answer is complete but not entirely correct. a-1. Value of equity…
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structures. ABC is all-equity financed with $500,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $250,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $51,000. Ignore taxes. a. Richard owns $25,000 worth of XYZ's stock. What rate of return is he expecting? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. Suppose Richard invests in ABC Co. and uses homemade leverage to match his cash flow in part (a). Calculate his total cash flow and rate of return. (Enter your return answer as a percent. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c. What is the cost of equity for ABC and XYZ? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) d. What is the WACC for ABC and…
Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table bel If the corporate tax rate is 22 percent, what is the aftertax cost of the company's debt? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. Aftertax cost of debt
Click here to read the eBook: Debt Management Ratios DEBT TO CAPITAL RATIO Kaye's Kitchenware has a market/book ratio equal to 1. Its stock price is $15 per share and it has 5.5 million shares outstanding. The firm's total capital is $115 million and it finances with only debt and common equity. What is its debt-to-capital ratio? Round your answer to two decimal places.
Chunky Cheese Pizza has $61.9 million in bonds payable. The bond indenture states that the debt to equity ratio cannot exceed 3.22. Chunky’s total assets are $201.9 million, and its liabilities other than the bonds payable are $91.9 million. The company is considering some additional financing through leasing. 1. Calculate total stockholders’ equity using the balance sheet equation. (Enter your answers in millions. (i.e., $5,500,000 should be entered as 5.5).) Stockholders’ Equity =
Three companies that subcontract with automobile manufacturers have the fol- lowing debt and equity capital amounts and D-E mixes. Assume all equity capital is in the form of stock. Assume the annual revenue is $15 million for each corporation and that, after debt service is considered, the net incomes are $14.4, $13.4, and $10.0 million, respectively. Compute the return on stock for each company, and comment on the return relative to the D-E mixes.
Ursala, Incorporated, has a target debt-equity ratio of 1.20. Its WACC is 8.7 percent, and the tax rate is 25 percent. a. If the company's cost of equity is 13 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of debt b. Cost of equity 6.31 % 13.39 %
The liabilities and owners’ equity for Campbell Industries is found here. What percentage of the firm’s assets does the firm now finance using debt (liabilities)? If Campbell were to purchase a new warehouse for $1.4 million and finance it entirely with long-term debt, what would be the firm’s new debt ratio?

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