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
a)    Calculate the price of a European style call option with 6 months left to maturity assuming a risk-free rate of 3.5% and a non-dividend paying stock which can change in price

A-Note is the highest tranche of an asset backed security or another structured financial product. An A-note is superior to other notes, like B-notes in bankruptcy or other credit

Question: (a) (i) De ne net premium and state the equation for net premium. (ii) Arshad, aged exactly 50, buys a 15-year endowment assurance policy with a sum assured of $ 5

On December 31, 2009, the Real Weapons Factory reported total stockholders' equity of $447,200. On that date, total contributed capital was $360,000. During 2009, the firm had tota

An investor buys a French government, 10-year bond, paying annual coupon of 4.5%. Face value = 1000. The investor is unsure of his investment horizon and considers 5 horizons: 5, 6

Question 1: ‘An internal rating system may incorporate supplementary customer information which is usually out of the reach of an external credit assessment institution.' Discu

Morningside nursing Home, a not-for-profit corporation, is estimating its corporate cost of capital.  Its tax-exempt debt currently requires an interest rate of 6.2 perce

The First Bank of Ellicott City has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.65 on this stock. What is the current price of

Suppose you take out a loan of $10,000, repayable by five equal annual instalments. The interest rate is 10% per year. (a) How much do you need to repay per year to the nearest ce

This is an accounting term which is applicable to stockholders of closely going businesses. Accumulated earnings and profits are a company's net profits after subtracting distribut