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Money, Inc., has no debt outstanding and a total market value of $200,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 25 percent lower. Money is considering a $65,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for this problem. a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) EPS Recession $ Normal $ Expansion $ a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) Percentage changes in EPS Recession % Expansion % b-1. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) EPS Recession $ Normal $ Expansion $ b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Percentage changes in EPS Recession % Expansion %
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 17 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its..
The maximum federal tax rate on personal income in 2010 was 50%. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lowe..
The subjective approach to project analysis:
What is the expected return on a portfolio that will decline in value by 13% in a recession, will increase by 16% in normal times, and will increase by 23% during boom times if each scenario has equal likelihood? A. 8.67% B. 13.00% C. 13.43% D. 17.33..
Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 13.0% and 15.0%, respectively. If you currently hold a market index portfolio, what would be the alpha for Portfolios A and B?
The following data apply to Saunders Corporation: Saunders Corporation currently has 1,000,000 common stocks outstanding. It considers raising $10 million through issuing 20-year 8% coupon bonds – annually paid - with 12 warrants. Each bond has a fac..
How would you use Capital Asset Pricing Model to identify undervalued and overvalued shares? Wealth Bank stock β is 0.80 and market return is 10%. If the government bond rate is 4% what is the expected return from an investment in Wealth Bank?
What is the market line? Why should a firm reject a projects lying below the market line and accept those lying above the line. What is the relationship between NPV and the discount rate?
The managing investment banker is responsible for
Retained Earnings Statement Rolt Company began 2013 with a $135,000 balance in retained earnings. During the year, the following events occurred: The company earned net income of $85,000. A material error in net income from a previous period was corr..
All of the following are commonly found in a well-constructed business plan, except for: All of the following represent generic business strategies except for: Determining in which markets a firm should compete requires management to consider which o..
Suppose that Lil John Industries’ equity is currently selling for $45 per share and that 3.8 million shares are outstanding. The firm also has 68,000 bonds outstanding, which are selling at 103 percent of par. Assume Lil John was considering an activ..
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