Viable Enterprises, Inc. is seeking to float a new bond to pay for an expansion of the firm intothe Midwest. However, some directors fear that the increase in bankruptcy risk might begreater than any benefits from Viable expanding into new markets. You have been tasked bythe CFO with estimating current bankruptcy risks, and you have decided to start bycalculating some simple default models. Shares outstanding for Viable are 0.53 million, andmarket price per share is $10.98. Using the table below, what is the Altman Z-Score (show 2decimal places)?CurrentAssetsTotalAssetsCurrent$12,414 EBIT$5,804Retained$43,416$17,028Earnings$8,467LiabilitiesTotal$14,459LiabilitiesSales$98,769

Calculating Altman Z-Score for Viable Enterprises:Step 1: Calculate RatiosWorking Capital Ratio =…

Answered: Viable Enterprises, Inc. is seeking to…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...

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The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?
Elona Zuckerberg is the CFO of Facenote company. made the following statements in a conference call after the financial report of fiscal year 2020 was released: Statement 1: We need to conduct a careful analysis to decide how much debt to issue because increasing our financial leverage could either increase or decrease Facenote's value. Statement 2: Increasing the debt-to-equity ratio will also make the payoff to equity investors more volatile (riskier) even with constant bankruptcy risk. Elona's Statements 1 and 2, respectively, correspond most closely to which of the following theories regarding capital structure? O Statement 1: Static trade-off theory; Statement 2: MM's propositions O Statement 1: MM's propositions; Statement 2: Pecking order theory O Statement 1: Pecking order theory; Statement 2: Static trade-off theory O Statement 1: MM's propositions; Statement 2: Static trade-off theory
Mr. Weiss just bought a zero-coupon bond issued by Risky Corp. for $870, with $1000 face value and one year to mature. He believes that the market will be in expansion with probability 0.9 and in recession with probability 0. In the event of expansion, Risky Corp. can always repay the debt. In the event of recession, the company would fail to meet its debt obligation. The bondholders would recover nothing and completely lose their investment, should the firm default. A zero-coupon government bond with the same maturity and face value is selling at $952.38. Assume that the government never defaults. The expected value and the standard deviation of the return of the market portfolio are 15% and 30%, respectively. Risky Corp’s bond return has a correlation of 0.67 with the market portfolio return. Assume that interest is compounded annually. The standard deviation of the return of the Risky Corp. bond is 34.48%. What is the beta of the bond? What would be the equilibrium expected…
In the Enron case, the company eventually turned to “back-door” guaranteeing of the debt of Chewco, one of its SPEs, to satisfy equity investors. Assume that a $16 million loan agreement required that Enron stock should not fall below $40 per share. If the share price did decline below that trigger amount, either the loan would be called by the bank or the bank could choose to increase the guaranteed number of Enron shares based on the new price (assume $32). If the bank decides to increase the number of shares guaranteed, what would be (1) the original number of shares in the guarantee and (2) the new number of shares? Why would it be important from an accounting and ethical perspective for Enron to disclose information about the guarantee in its financial statements?
Labrador technologies Inc. plans to become public soon. The board of directors would like to know the value of common equity and have asked for your opinion. The firm has $1,249,917 in preferred equity and the market value of its outstanding debt equals $2,049,396. The WACC for this firm is estimated to be 8.92%. For this example assume the current assets are zero. Use the DCF valuation model with the expected FCFs shown below; year 1 represents one year from today and so on. The company expects to grow at a 3.0% rate after Year 5. Rounding to the nearest penny, what is the value of common equity? Free Cash Period Flow Year 1 $1,370,274 Year 2 $1,761,479 Year 3 $1,909,652 Year 4 $2,361,090 Year 5 $2,744,645
Vapid Motors Inc. is considering a change to its capital structure. Selected financial information is provided in the table below. The current capital structure is shown in the column labeled 'Current'. Vapid is trying to choose between two financing alternatives. Under Option A, they will sell 140 new shares at the current price. Under Option B, they will borrow $133 at 6.767% and no new equity will be issued. There are currently 700 shares outstanding, and the firm is debt-free. The tax rate is 40%. What is the EBIT-EPS indifference point? Selected Financial Information Vapid Motors Inc. Debt Interest Tax Rate Price Current $0 $0 40% $0.95 Shares Outstanding 700 Option A $0 $0 40% n.a. 840 Option B $133 $9 40% n.a. 700 The EBIT-EPS indifference point is $ ____. (Round to the nearest dollar.)
Santos Unlimited (SU) was originally unlevered with 4500 shares outstanding. However, after a major financial restructure, SU now has $39000 of debt, with an annual interest expense of 7 percent. The restructuring has reduced the number of shares to 3800. A group of shareholders of SU are not convinced that this move towards adopting financial leverage is a good idea. Their main argument is that there is now some range of EBIT, however low, that will make the shareholders worse off than before. Help understand the situation better by computing the level of earnings before interest and tax (EBIT) that would make shareholders indifferent between being unlevered (i.e. not having any debt) and levered (i.e. having debt). Assume a 30 percent corporate tax rate. Answer: $
Suppose Tefco Corp. has a value of $154 million if it continues to operate, but has outstanding debt of $176 million that is now due. If the firm declares bankruptcy, bankruptcy costs will equal $21 million, and the remaining $133 million will go to creditors. Instead of declaring bankruptcy, management proposes to exchange the firm's debt for a fraction of its equity in a workout. What is the minimum fraction of the firm's equity that management would need to offer to creditors for the workout to be successful? Tefco could offer its creditors % of the firm in a workout. (Round to one decimal place.)
Assume that $500 million of Power’s long-term debt is due and the board of directors are meeting to discuss a proposed plan of retiring the $500 million of long-term debt and replace it with additional common stock. It is estimated that the issuance of additional stock will increase the market capitalization by $500 million. What would be the effect of these plans on Power’s Altman Z-score and its perceived risk of bankruptcy had the plan been executed just before the end of 2018? Discuss, and provide calculations to support your analysis.
Please answer
Which of the following statements is true? a. High liquidity means a company is short on cash and may be unable to pay its debts.b. When a company decides to go public through an IPO, it is typically targeting to sell its shares to only a handful of shareholders. c. If the company has a higher than expected extremely high profit this year, equity holders will benefit more than debt holders as debtholders are the residual claimers for the cash flows of the company.d. In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy.e. Equity holders expect to receive dividends and the firm is always legally obligated to pay them.
A public company has asked for your help. They are having a hard time dealing with earningsper share and would like your consultation. They are planning on issuing a few securities in thecoming year and would like your help. Please discuss how these two issues will impact thediluted earnings per share calculation.1) Convertible debt where a required conversion will take place ten years after the issuedate2) Debt with detachable warrants. The warrants may be exercised if profits exceed acertain threshold in the next five years ($1,000,000 is the threshold).

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