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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 active change to its capital structure so that the firm would have a (D/E) of 1.4. Which type of security (stocks or bonds) would it need to sell to accomplish this? How much would the firm have to sell? (Enter your answer in dollars not in millions).
Consider a 20-year, $105,000 mortgage with a 5.70 percent interest rate. After nine years, the borrower (the mortgage issuer) pays it off. How much will the lender receive?
Assume that the risk-free rate is 6.5% and that the market risk premium is 4%. What is the required rate of return on a stock with a beta of 0.9? What is the required rate of return on a stock with a beta of 0.8? What is the required return on the ma..
Using the capitalized earnings method (EPS/RS), compute the estimated share values associated with each of the capital structures. Select the optimal capital structure on the basis of: Maximization of expected earnings per share.
Your firm is considering a new investment proposal and would like to calculate the weighted average cost of capital. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12.1% that is paid semi annually. The bond ..
Tyler Trucks stock has an annual return mean and standard deviation of 8 percent and 27 percent, respectively. Michael Moped Manufacturing stock has an annual return mean and standard deviation of 19.0 percent and 63 percent, respectively.
Your firm is contemplating the purchase of a new $630,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $42,000 at the end of that time.
We have seen that over long periods of time, stock investments have tended to substantially outperform bond investments. However, it is not at all uncommon to observe investors with long horizons holding entirely bonds. Are such investors irrational?..
A purely competitive firm finds that the market price for its product is $30.00. It has a fixed cost of $100.00 and a variable cost of $17.50 per unit for the first 50 units and then $35.00 per unit for all successive units. What is the average varia..
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.49 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be w..
The beta of M Simon Inc., stock is 1.7, whereas the risk-free rate of return is 0.08. If the expected return on the market is 0.14, then what is the expected return on M Simon Inc?
Your firm has an average collection period of 39 days. Current practice is to factor all receivables immediately at a 2.00 percent discount. What is the effective cost of borrowing in this case?
R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year's annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face valu..
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