There are two periods: 0 and 1. A newly formed company wants to invest in an apple tree, which produces apples only at period 1. There are three states at period 1: good, fair and bad and the tree produces 60, 30 and 20 apples in these states, respectively. The company decides to issue one bond to finance the purchase of the tree and promises to pay the bondholder 19 apples regardless of the realized state. To raise additional funds, the company also issues one stock. How many apples will the stock pay in the bad state?

There are two periods: 0 and 1. A newly formed company wants to invest in an apple tree, which produces apples only at period 1. There are three states at period 1: good, fair and bad and the tree produces 60, 30 and 20 apples in these states, respectively. The company decides to issue one bond to finance the purchase of the tree and promises to pay the bondholder 19 apples regardless of the realized state. To raise additional funds, the company also issues one stock. How many apples will the stock pay in the bad state?

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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An enterprise owner is considering three options to raise funds for his business activities, each with a different source of capital: • option I-business activities financed exclusively with equity of $600,000, • option II equity amounts to $450,000, the remaining $150,000 is borrowed from a bank at the annual rate of 7.6%, option III equity amounts to $350,000, the remaining $250,000 is borrowed from a bank at the annual rate of 10.4%. The annual net sales revenue is expected to reach $760,000 with total operating costs being $687,000. The enterprise pays 19% income tax. Based on the information provided, determine: return on equity depending on the adopted financing option and its increase (AROE) possible to obtain due to using the debt, ● the degree of financial leverage for each financing option, .threshold EBIT and the threshold return on equity needed for financial leverage to work.
Novak Company would like to start a new venture. The company is currently in the 24% marginal tax bracket and uses a 4% discount factor. The company projects that the venture will produce before-tax cash flows of $9,000 in Year 0, $20,000 in Year 1, and $33,000 in Year 2. (a) If taxable income and the before-tax cash flows are equal in the year received, compute the present value of the cash flows. (Round present value factor calculations to 3 decimal places, e.g. 1.251 and final answer to O decimal places, e.g. 58,971.) Present value
XYZ Enterprises Limited needs to raise additional funding to expand its manufacturing operations. The company decides to issue $5 million in debentures over the next three months. The paper will be issued into the Secondary market True False A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares True False
Please show complete steps thanks and correctly.
Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $30 million gaming center: a. Issue $34 million of 6% bonds at face amount.b. Issue 1 million shares of common stock for $34 per share. 1. Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. (Enter your answer in dollars, not millions. (i.e., $5.5 million should be entered as 5,500,000). Round your "Earnings per Share" to 2 decimal places. Round your "Earnings per Share" to 2 decimal places.) Issue Bonds Issue stock Operating income 10,900,000 10,900,000 Interest expense (bonds only) Income before tax Income tax expense (40%) Net Income Number of shares 3,900,000 4,900,000 Earnings per share
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Foundation, Incorporated, is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 200,000 shares of stock outstanding. Under Plan II. there would be 150,000 shares of stock outstanding and $2.15 million in debt outstanding. The Interest rate on the debt is 5 percent and there are no taxes. a. Use M&M Proposition I to find the price per share. (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the firm under each of the two proposed plans? (Do not round Intermediate calculations and round your answers to the nearest whole dollar amount, e.g., 32) a. Share price b. All-equity firm value b. Levered plan firm value
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Farmer Belle grows Christmas trees which mature over 5 years, and have a maturity value of $40 per tree. Belle has 12,000 trees and applies for a loan for working capital. Wee Bank agrees to loan Belle 70% of the present value of the maturity value of the trees, with equal payments to be made, starting today, at the beginning of each of the next 4 years. The interest rate is 5%. What is the present value of the maturity value of the trees, and the total amount that can be borrowed? Assume that the amount that Belle can borrow is $262,750. How much can be withdrawn from the bank each of the 4 years given the interest rate? Note: amounts are rounded to the nearest dollar, based on table values.
The company has $60,000 to invest. The investment manager proposed two options. Option (A) is to invest in municipal bonds paying 7% annual interest. Option (B) is to invest in a corporate bond paying 9.5% annual interest. Both investments have similar risks. Assume that Pioneer has 15% marginal tax rate. The investment manager recommended to invest the money in municipal bonds. Why in your opinion, the investment manager selected option (A)? What is your recommendation to Pioneer? And why? Would your recommendation change if you apply implicit and explicit tax concepts for the above proposal? And why

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