Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 16, Problem 8QP
Homemade Leverage Star, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 35 percent debt Currently there are 6,000 shares. outstanding and the price per share is $58. EBIT is expected to remain at $39,600 per year forever. The interest rate on new debt is 7 percent, and there are no taxes.
- a. Ms. Brown, a shareholder of the firm, owns 100 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a
dividend payout rate of 100 percent? - b. What will Ms. Brown’s cash flow be under the proposed capital structure of the firm? Assume that she keeps all 100 of her shares.
- c. Suppose the company does convert, but Ms. Brown prefers the current all-equity capital structure. Show how she could unlever her shares of stock to recreate the original capital structure.
- d. Using your answer to part (c), explain why the company's choice of capital structure is irrelevant.
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Finch, Incorporated, is debating whether to convert its all-equity capital structure to one
that is 20 percent debt. Currently, there are 11,000 shares outstanding, and the price per
share is $58. EBIT is expected to remain at $24,200 per year forever. The interest rate
on new debt is 7.5 percent, and there are no taxes.
a. Allison, a shareholder of the firm, owns 200 shares of stock. What is her cash flow
under the current capital structure, assuming the firm has a dividend payout rate of
100 percent? (Do not round intermediate calculations and round your answer to 2
decimal places, e.g., 32.16.)
b. What will Allison's cash flow be under the proposed capital structure of the firm?
Assume she keeps all 200 of her shares. (Do not round intermediate calculations
and round your answer to 2 decimal places, e.g., 32.16.)
c. Assume that Allison unlevers her shares and re-creates the original capital structure.
What is her cash flow now? (Do not round intermediate calculations and round your…
Chapter 16 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 16 - MM Assumptions List the three assumptions that lie...Ch. 16 - Prob. 2CQCh. 16 - Prob. 3CQCh. 16 - MM Propositions What is the quirk in the tax code...Ch. 16 - Prob. 5CQCh. 16 - Prob. 6CQCh. 16 - Optimal Capital Structure Is there an easily...Ch. 16 - Financial Leverage Why is the use of debt...Ch. 16 - Homemade Leverage What is homemade leverage?Ch. 16 - Capital Structure Goal What is the basic goal of...
Ch. 16 - Prob. 1QPCh. 16 - EBIT, Taxes, and Leverage Repeat p arts (a) and...Ch. 16 - ROE and Leverage Suppose the company in Problem 1...Ch. 16 - Break-Even EBIT Franklin Corporation is comparing...Ch. 16 - Prob. 5QPCh. 16 - Break-Even EBIT and Leverage Kolby Corp. is...Ch. 16 - Leverage and Stock Value Ignoring taxes in Problem...Ch. 16 - Homemade Leverage Star, Inc., a prominent consumer...Ch. 16 - Homemade Leverage and WACC ABC Co. and XYZ Co. are...Ch. 16 - MM Scarlett Corp. uses no debt. The weighted...Ch. 16 - Prob. 11QPCh. 16 - Calculating WACC Weston Industries has a...Ch. 16 - Prob. 13QPCh. 16 - MM and Taxes Bruce Co. expects its EBIT to be...Ch. 16 - MM and Taxes In Problem 14, what is the cost of...Ch. 16 - MM Proposition I Levered, Inc., and Unlevered,...Ch. 16 - MM Tool Manufacturing bas an expected EBIT of...Ch. 16 - Firm Value Cavo Corporation expects an EBIT of...Ch. 16 - MM Proposition I with Taxes The Dart Company is...Ch. 16 - MM Proposition I without Taxes Alpha Corporation...Ch. 16 - Cost of Capital Acetate, Inc., has equity with a...Ch. 16 - Homemade Leverage The Veblen Company and the...Ch. 16 - MM Propositions Locomotive Corporation is planning...Ch. 16 - Stock Value and Leverage Green Manufacturing,...Ch. 16 - Prob. 25QPCh. 16 - Prob. 26QPCh. 16 - Prob. 27QPCh. 16 - Prob. 28QPCh. 16 - Prob. 29QPCh. 16 - Prob. 30QPCh. 16 - STEPHENSON REAL ESTATE RECAPITALIZATION Stephenson...Ch. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - Prob. 4MCCh. 16 - Prob. 5MC
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