You are considering a stock investment in one of two firms (NoEquity, Inc, and NoDebt, Inc), both of which operate in the same industry and have identical operating income of $255 milion. NoEquity, Inc.., finances its $50 million in assets with $49 milion in debt (on which it pays 10 percent interest annualy) and $1 million in equity. NoDebt, Inc., finances its $50 million in assets with no debt and $50 million in equity Both firms pay a tax rate of 30 percent on ther taxable income Colculate the net income and return on assets for the two firms (Enter your doller answers in millions of dollars. Round all answers to 2 decimal pleces.) NoEquity $0 NoDebt m Net income Return on assets

You are considering a stock investment in one of two firms (NoEquity, Inc, and NoDebt, Inc), both of which operate in the same industry and have identical operating income of $255 milion. NoEquity, Inc.., finances its $50 million in assets with $49 milion in debt (on which it pays 10 percent interest annualy) and $1 million in equity. NoDebt, Inc., finances its $50 million in assets with no debt and $50 million in equity Both firms pay a tax rate of 30 percent on ther taxable income Colculate the net income and return on assets for the two firms (Enter your doller answers in millions of dollars. Round all answers to 2 decimal pleces.) NoEquity $0 NoDebt m Net income Return on assets

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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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.
The Company 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 405, 053 shares of stock outstanding. Under Plan II, there would be 337, 151 shares of stock outstanding and $5.9 million in debt outstanding. The interest rate on the debt is 9.05 percent, and there are no taxes. The breakeven EBIT is $
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 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $1.9 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes. a. If EBIT is $425,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. If EBIT is $675,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c. What is the break-even EBIT? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) a. Plan I EPS a. Plan II EPS b. Plan I EPS b. Plan II EPS c. Break-even EBIT
SodaFizz has debt outstanding that has a market value of $3 million. The company’s stock has a book value of $2 million and a market value of $6 million. What are the weights in SodaFizz’s capital structure?
Foundation, Inc., 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 145,000 shares of stock outstanding. Under Plan II, there would be 125, 000 shares of stock outstanding and $716, 000 in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. a. If EBIT is $300, 000, which plan will result in the higher EPS? b . If EBIT is $600,000, which plan will result in the higher EPS? c. What is the break - even EBIT? d. use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?
Dickson Corporation is comparing two different capital structures. Plan I would result in 26,000 shares of stock and $85,500 in debt. Plan II would result in 20,000 shares of stock and $256,500 in debt. The interest rate on the debt is 6 percent. a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $95,000. The all-equity plan would result in 29,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (Do not round intermediate calculations.) c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.) d-1. Assuming that the corporate tax rate is 22 percent, what is the EPS of the firm? (Do not round intermediate calculations and round your answers to 2…
Reynolds Construction's current value of operations is $750 million based on the free cash flow valuation model. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, and $300 million of total debt. What is the best estimate for the firm's value of equity, in millions?.
AAA Corporation and BBB Corporation are identical in every way except their capital structures. AAA Corporation, an all-equity firm, has 40million shares of stock outstanding, currently worth $15 per share. BBB Corporation uses leverage in its capital structure. The market value of BBB’s debt is $100million and its cost of debt is 6.7 percent. Each firm is expected to have earnings before interest of $200 million in perpetuity. Assume that every investor can borrow at 6.7 percent per year. Corporate tax rate is 35%. (SHOW YOUR WORK) 1). What is the value of AAA Corporation? 2). What is the value of BBB Corporation? 3). What is the market value of BBB Corporation’s equity? 4). What would be the BBB’s cost of equity (Rs)? 5). What would be BBB’s weighted average cost of capital (WACC)?
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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 205,000 shares of stock outstanding. Under Plan II, there would be 155,000 shares of stock outstanding and $3.1 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. a. If EBIT is $600,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. If EBIT is $850,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c. What is the break-even EBIT? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) X Answer is not complete. $ a. Plan I EPS a. Plan II EPS b. Plan I EPS b. Plan II EPS c. Break-even EBIT 3.08 X
There are two firms: Firm U and Firm L. Both firms have $30,000 total assets and $5,000 EBIT (earnings before interest and taxes). Firm U is an unlevered firm without debt, and its number of outstanding shares is 1,000. Firm L is a levered firm financed with 50% debt and 50% common equity. The firm plans to use the debt to repurchase 50% of the outstanding shares (Note: reduce the outstanding shares). The pre-tax cost of debt for Firm L is 10%. Both firms have a 20% corporate tax rate. Calculate the earnings per share (EPS) for the unlevered firm U. A)$3.5 per share B)$5.0 per share C)$4.0 per share D)$5.6 per share

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