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ABC Company, an unleveraged firm, has a total market value of $10 million, consisting of 500,000 shares of common stock selling at $20/share. Management is considering recapitalizing by issuing enough debt so that the firm as a capital structure consisting of 20% debt at a before tax cost of 10%. ABC will use the proceeds to repurchase the stock at the new equilibrium market price. ABC's marginal tax rate is 40%. It has EBIT of $2 million, it expects zero growth in EBIT and pays out all earnings as dividends.
a) Consider ABC's levered beta is 1.15, the risk free rate (Rf) is 7% and the expected market return (Rm) is 12%. What is the new cost of equity under the capital structure financed with 20% debt?
b) Using the new cost of equity, what is the new WACC?
c) What is the new total corporate value of ABC?
What was the change in Global Conglomerate’s book value of equity from 2008 to 2009 according to Table 2.1? Does this imply that the market price of Global’s shares increased in 2009? Explain.
Calculation of Debt Ratio and Total Asset Turnover Ratio and Compute the following ten financial ratios and provide a one sentence explanation of the analytic use of each ratio test. Show your formulas and input.
Flu cases this past fly season in the Central City school system were about 15 per week. For the entire state, the weekly average is 16 and the standard deviation, 2.35. Are the kids in Central City as sick as the kids throughout the state?
At the end of 3 years you need to return the deposit and the interest to the customer. How much will you have to give the customer in 3 years?
What is the incremental coast associated with producing an extra 50,000 jars of salsa?
What is the value of a put option written on the stock with the same exercise price and expiration date as the call option? Round your answer to the nearest cent.
Which of the following would be considered a fixed cost in a manufacturing setting?
What is the maximum increase in sales that can be sustained assuming no new equity is issued? (Do not round your intermediate calculations.)
A bond is selling at a premium of $300, pays a coupon of 10% and the ttm is 5 years. What is the market yield?
A firm has a common stock with a market price $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows.
How much will Jane have in her retirement account immediately after she makes her last contribution in Year 40, assuming a return on her investments of 9%?
Assume the equilibrium real rate is 3 percent and the expected rate of inflation in the U.S. is 4 percent. Determine the equilibrium nominal interest rate?
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