Homework Help, Corporate Finance

Look back to Section 13–1 (Table 13.2 on p. 329). Suppose that Ms. Macbeth’s investment bankers have informed her that since the new issue of debt is risky, debt holders will demand a return of 12.5%, which is 2.5% above the risk-free interest rate.

a. What are rA and rE?

b. Suppose that the beta of the unlevered stock was .6. What will A, E, and D be after the change to the capital structure?
Step 1:
Operating income F
Market value of shares F
Expected return on debt F
Number of Shares F
Price per share F
Market value of shares- new debt F Tip - see sidebar for Table 2
Market value of debt F
Formula Calculation
a. rA T C TIP: see formulas on p. 331
rE T C
Calculation
b. ßA F
ßE C TIP: calculate E/V and D/V first
ßD C
Number of shares 500
Price per share $10
Market value of shares $5,000
Market value of debt $5,000
Interest at 10% $500
Operating Income 500 1,000 1,500 2,000
Interest 500 500 500 2,000
Equity earnings 0 500 1,000 1,500
Earnings per shares 0 1 2 3
Return on shares 0 10 20 30
Posted Date: 8/2/2012 9:12:22 AM | Location : United States







Related Discussions:- Homework Help, Assignment Help, Ask Question on Homework Help, Get Answer, Expert's Help, Homework Help Discussions

Write discussion on Homework Help
Your posts are moderated
Related Questions
Ask que We are evaluating a project that costs $800,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the pr

Benefits FCF is widely used valuation to estimate enterprise value. It measures the value of free cash flow which organisations generate from daily operating activities. DFCF m

Question: (a) Give a definition of electronic banking and electronic money. (b) Outline the main differences between smart cards, credit cards and debit cards. (c) Giv


GeKay stock is worth $100, or $80, or $60. Investors believe that each case is equally likely so that the current share price is the average, namely $80.  Suppose Mr. Satanak, th

Question: a) Using illustrative and numerical examples, differentiate between speculation and arbitraging in the context of foreign exchange market. b) One year borrowing

corporate finance, Financial Accounting Calculate the market value of Renowned Cola''''s debt at year-end 2005. What is the book value of debt? Why do usually use market or book va

Finance There are various ways of making a payment for M&A. Cash, stock-swap and combination of both. The hybrid paying method is commonly used method for most of organisations

Pfizer Incorporated has 2 million shares of common stock, selling at $18 each. The β of the stock is 1.5, T-bill rate is 6%, and the expected return on the market is 12%. Pfizer al

Ask qCan the goal of maximizing the value of the stock conflict with other goals such as avoiding unethical or illegal behavior? In particular, do subjects like customer and employ