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…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 33P

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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?
Galaxy Corporation is proposing a recapitalization that would increase its debt level and interest cost. The company will sell new bonds and repurchase shares of its common stock with the proceeds. According to the company's CFO, the initiative will not affect net assets or operating profits, but it will raise earnings per share (EPS). Which of the following statements is CORRECT, assuming the CFO's calculations are correct? * Since the proposed plan raises Galaxy's financial risk, the company's stock price can fall even if EPS rises. More bonds will be issued under the plan, increasing their liquidity and, as a result, lowering the interest rate on the bonds that are currently outstanding. Since the plan is expected to raise EPS, net income is also expected to grow. If the strategy succeeds in increasing EPS, the stock price would rise at the same rate. If the plan decreases the WACC, the stock price is likely to fall as well.
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?
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.
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).
Little Lemon Co. is identifying the value of its equity using the enterprise value approach as they have never issued dividends to date because the Company is still at its early stages. With this, they have the following available information:The government's real free rate for its debt securities is estimated at 3.5% with an estimated inflation premium of 1.5%.The target capital structure of Little Lemon is at 60% debt and 40% equityLittle Lemon was able to determine that its cost of debt is estimated as:With 3 years maturity - 6.50%With 4 years maturity - 7.0%With 5 years maturity - 8.0%The following are the information about the current debts issued by Little LemonA 3-year maturity instrument carries a Php500,000 face value and 8.0%couponA 5-year maturity instrument carries a Php500,000 face value and 8.0%couponConsidering the current crisis, equity investors generally demand a 3.5%premium over government securitiesLittle Lemon's estimated beta is at 1.2The following summarizes the…
Suppose Tefco Corp. has a value of $131 million if it continues to operate, but has outstanding debt of $160 million that is now due. If the firm declares bankruptcy, bankruptcy costs will equal $22 million, and the remaining $109 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.) C
Little Lemon Co. is identifying the value of its equity using the enterprise valueapproach as they have never issued dividends to-date because the Company isstill at its early stages. With this, they have the following available information:The government's real free rate for its debt securities is estimated at 3.5% withan estimated inflation premium of 1.5%.The target capital structure of Little Lemon is at 60% debt and 40% equityLittle Lemon was able to determine that its cost of debt is estimated as:With 3 years maturity - 6.50%With 4 years maturity - 7.0%With 5 years maturity - 8.0%The following are the information about the current debts issued by Little LemonA 3-year maturity instrument carries a Php500,000 face value and 8.0%couponA 5-year maturity instrument carries a Php500,000 face value and 8.0%couponConsidering the current crisis, equity investors generally demand a 3.5%premium over government securitiesLittle Lemon's estimated beta is at 1.2How much is the weighted average…

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