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Capital Structure Analysis The Rivoli Company has no debt outstanding, and its financial position is given by the following data: Assets (Market value = book value) $3,000,000 EBIT $500,000 Cost of equity, rs 10% Stock price, Po $15 Shares outstanding, no 200,000 Tax rate, T (federal-plus-state) 40% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 35% debt based on market values, its cost of equity, rs, will increase to 11% to reflect the increased risk. Bonds can be sold at a cost, rd, of 9%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time. What effect would this use of leverage have on the value of the firm? I. Increasing the financial leverage by adding debt results in an increase in the firm's value. II. Increasing the financial leverage by adding debt results in a decrease in the firm's value. III. Increasing the financial leverage by adding debt has no effect on the firm's value. What would be the price of Rivoli's stock? Round your answer to the nearest cent. $ per share What happens to the firm's earnings per share after the recapitalization? Round your answer to the nearest cent. The firm its EPS by $ . The $500,000 EBIT given previously is actually the expected value from the following probability distribution: Probability EBIT 0.10 - $ 105,000 0.20 150,000 0.40 400,000 0.20 750,000 0.10 1,705,000 Determine the times-interest-earned ratio for each probability. Round your answers to two decimal places. Probability TIE 0.10 0.20 0.40 0.20 0.10 What is the probability of not covering the interest payment at the 35 percent debt level? Round your answer to two decimal places. %.
A European option gives its owner the right to exchange two shares of Stock R for a share of Stock S at the end of 9 months. The value of this option is $8.96. The continuously compounded risk-free interest rate is 9%.
Formulate and solve an integer linear programming model to assist the park’s management to plan and schedule the number of new employees it hires each week in order to minimize the total number of new employees it must hire during the summer. It may ..
Luxury boxes have been constructed at a football stadium at a cost of $4,000,000 paid at EOM 0. In addition to construction, heavy maintenance is expected to occur every 24 months thereafter en perpetuity and cost $100,000 for every occurrence. Find ..
A firm has 20 year $5 million of debt which was acquired 2 years ago and is currently selling at 115% of par value. The debt has a coupon rate of 7% and the current tax rate is 35%. What is the before tax cost of debt? A. 7.00% B. 5.72% C. 5.65% D. 3..
Create two stock portfolios, denoted A and B, each of which consists of ten (10) individual common stocks. Assume that each stock is equally weighted in each portfolio. Stocks in portfolio A must be from the same industry (at least the first two digi..
The calculation of the EAR (Effective Annual Rate) must factor in commitment fees, origination fees, compensating balance requirements, usable funds, and any other costs associated with a loan. Why are these important considerations when deciding the..
Janetta Corp. has an EBIT rate of $1,005,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 14 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue outsta..
You are considering adding a new software title to those published by your highly successful software company. If you add the new product, it will use capacity on your disk duplicating machines that you had planned on using for your flagship product,..
If the total value of the assets of the accounting entity is $4,350,000 and the total liabilities of the accounting entity are $1,235,000 the stockholders' equity in the accounting entity is?
The continuously comounded zero rates for 0.5 and 1 years are 4% and 5%, respectively. what is the price of a bond that pays $2 every six months and has 1 year to maturity ( Note: par value is $100)? Show your work
We buy a car for $40,000. They charge us 8% annual interest. We pay the loan off quarterly. We want to know the effective annual ROR and the quarterly amount to pay off the loan in 6 years. Furthermore, if we had enough after 1 year, how much do we n..
How does taxes and depreciation impact income and cash flows? Post an exercise that illustrates how to compute operating cash flows.
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