Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 24, Problem 13PS
Summary Introduction
To determine: The amount that would each debt holders be entitled to receive.
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Binomial Tree Farm's financing includes $5 million of bank loans. Its common equity is shown in Binomial's Annual Report at $6.67
million. It has 500,000 shares of common stock outstanding, which trade on the Wichita Stock Exchange at $18 per share. What debt
ratio should Binomial use to calculate its company cost of capital or asset beta?
Note: Enter your answer as a percent rounded to 2 decimal places.
Debt ratio
%
Here is Icknield’s market-value balance sheet (figures in $ millions):
Net working capital
$550
Debt
$800
long term assets
$2,150
Equity
$1,900
value of firm
$2,700
$2,700
The debt is yielding 7%, and the cost of equity is 14%. The tax rate is 21%. Investors expect this level of debt to be permanent.
a. What is Icknield’s WACC?
b. How would the market-value balance sheet change if Icknield retired all its debt?
Suppose that Backwoods Chemical's book balance sheet is:
Backwoods Chemical Company (Book Values)
Debit
Net working capital
Net fixed assets
$ 400
1,600
Total assets
$ 2,000
$ 1,000
1,000
$ 2,000
Credit
Debt
Equity (net worth)
Total value
The debt has a one-year maturity and a promised interest payment of 9%. Thus, the promised payment to Backwoods's creditors is
$1,090. The market value of the assets is $1,200, and the standard deviation of asset value is 45% per year. The risk-free interest rate
is 9%. Calculate the value of Backwoods's debt and equity.
Note: Do not round intermediate calculations. Round your answers to the nearest whole number.
Value of equity
Value of debt
Chapter 24 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Sinking funds For each of the following sinking...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 4PSCh. 24 - Prob. 5PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Prob. 7PSCh. 24 - Prob. 8PSCh. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Prob. 10PS
Ch. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Prob. 13PSCh. 24 - Prob. 14PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Prob. 16PSCh. 24 - Prob. 17PSCh. 24 - Call provisions a. If interest rates rise, will...Ch. 24 - Prob. 19PSCh. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 21PSCh. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 23PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Prob. 25PSCh. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 29PS
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