
Concept explainers
Info Systems Technology (IST) manufactures microprocessor chips for use in appliances and other applications. IST has no debt and 100 million shares outstanding. The correct price for these shares is either $14.50 or $12.50 per share. Investors view both possibilities as equally likely, so the shares currently trade for $13.50. IST must raise $500 million to build a new production facility. Because the firm would suffer a large loss of both customers and engineering talent in the event of
- a. Suppose that if IST issues equity, the share price will remain $13.50. To maximize the long-term share price of the firm once its true value is known, would managers choose to issue equity or borrow the $500 million if
- i. They know the correct value of the shares is $12.50?
- ii. They know the correct value of the shares is $14.50?
- b. Given your answer to part (a), what should investors conclude if IST issues equity? What will happen to the share price?
- c. Given your answer to part (a), what should investors conclude if IST issues debt? What will happen to the share price in that case?
- d. How would your answers change if there were no distress costs, but only tax benefits of leverage?

Want to see the full answer?
Check out a sample textbook solution
Chapter 16 Solutions
Corporate Finance
Additional Business Textbook Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Macroeconomics
Intermediate Accounting (2nd Edition)
Operations Management
Principles Of Taxation For Business And Investment Planning 2020 Edition
Financial Accounting: Tools for Business Decision Making, 8th Edition
- What is the 4% rule in retirement planning in finance? no aiarrow_forwardWhat is the 4% rule in retirement planning in finance?arrow_forward(Calculating NPV) Carson Trucking is considering whether to expand its regional service center in Moab, Utah. The expansion will require the expenditure of $10,000,000 on new service equipment and will generate annual net cash inflows from reduced costs of operations equal to $2,500,000 per year for each of the next 8 years. In year 8, the firm will also get back a cash flow equal to the salvage value of the equipment, which is valued at $1 million. Thus, in year 8, the investment cash inflow will total $3,500,000. Calculate the project's NPV using a discount rate of 9 percent. If the discount rate is 9 percent, then the project's NPV is (round your answer to the nearest dollar) Sarrow_forward
- (Calculating annuity payments) The Aggarwal Corporation needs to save $7 million to retire a(n) $7 million mortgage that matures in 17 years. To retire this mortgage, the company plans to put a fixed amount into an account at the end of each year for 17 years. The Aggarwal Corporation expects to earn 13 percent annually on the money in this account. What equal annual contribution must the firm make to this account to accumulate the $7 million by the end of 17 years? The equal annual contribution Aggarwal must make to this account is (round your answer to the nearest cent) $.arrow_forward(Calculating NPV) Big Steve's Swizzle Sticks is considering the purchase of a new plastic stamping machine. This investment will require an initial outlay of $95,000 and will generate net cash inflows of $17,000 per year for 11 years. a. What is the project's NPV using a discount rate of 13 percent? Should the project be accepted? Why or why not? b. What is the project's NPV using a discount rate of 14 percent? Should the project be accepted? Why or why not? c. What is this project's IRR? Should the project be accepted? Why or why not?arrow_forwardThe number of years it will take for $490 to grow to $1,057.86 at 7 percent compounded annually is (type your answer in years, round to one decimal place) years.arrow_forward
- The number of years it will take for $500 to grow to $1,039.50 at 5 percent compounded annually is (type your answer in years, round to one decimal place) years.arrow_forward(Round your answer to the nearest cent.) $5,000 invested for 10 years at 10 percent compounded annually will accumulate to $arrow_forwardWhat is the difference between operating leverage and financial leverage in finance? i need coarrow_forward
- What is the Sharpe ratio and how is it used to evaluate investments? need helparrow_forwardWhat is the difference between operating leverage and financial leverage in finance? need helparrow_forwardA comparative balance sheet and income statement is shown for Cruz, Incorporated. CRUZ, INCORPORATED Comparative Balance Sheets At December 31 2021 2020 Assets Cash Accounts receivable, net $ 85,600 36,800 $ 21,300 Prepaid expenses Inventory Total current assets Furniture Accumulated depreciation-Furniture Total assets Liabilities and Equity Accounts payable Wages payable 77,100 45,200 84,900 4,700 3,900 204,200 155,300 94,700 (14,700) $ 284,200 $ 13,400 8,000 (8,400) $ 257,400 $ 19,000 4,500 110,500 Income taxes payable 1,400 2,500 Total current liabilities Notes payable (long-term) Total liabilities Equity Common stock, $5 par value Retained earnings 22,800 26,000 28,900 66,400 51,700 92,400 204,000 28,500 162,300 2,700 Total liabilities and equity $ 284,200 $ 257,400 CRUZ, INCORPORATED Income Statement Sales For Year Ended December 31, 2021 $ 440,700 283,700 157,000 Cost of goods sold Gross profit Operating expenses (excluding depreciation) Depreciation expense Income before taxes…arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning

