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Music City, Inc., has no debt outstanding and a total market value of $295,000. Earnings before interest and taxes, EBIT, are projected to be $23,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 40 percent lower. The company is considering an $88,500 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. Suppose the company has a market-to-book ratio of 1.0. a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also calculate the percentage changes in ROE for economic expansion and recession, assuming no taxes. b. Repeat part (a) assuming the firm goes through with the proposed recapitalization. c. Repeat parts (a) and (b) of this problem assuming the firm has a tax rate of 35%.
Stock R has a beta of 1.4, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13%, and the risk-free rate is 5%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exc..
A bond has a par value of $1,000, a time to maturity of 15 years, and a coupon rate of 7.60% with interest paid annually. If the current market price is $760, what will be the approximate capital gain of this bond over the next year if its yield to m..
Joe secured a loan of $12,000 three years ago from a bank for use toward his college expenses. The bank charges interest at the rate of 4%/year compounded monthly on his loan. Now that he has graduated from college, Joe wishes to repay the loan by am..
Your group has been assigned task of determining what value to place on call option for your firm. The current stock price per share is $54.52. Six months from now management believes the stock price will either fall by 25% or rise by 33%. Using opti..
CalJuice Company has decided to introduce three fruite juices made from blending two or more concentrates. These juices will be packaged in 2-qt (64-oz) cartons. One carton of pineapple-orange juice requires 8 oz each of pineapple and orange juice co..
Interest versus dividend income During the year just ended
A firm desires a WACC of 8.4 percent. Its cost of equity is 11.2 percent and its pre-tax cost of debt is 7.1 percent. The firm does not issue preferred stock. The tax rate is 38 percent. What must the debt- equity ratio of the firm be if it is to ach..
Project K costs $50,000, its expected cash inflows are $14,000 per year for 6 years, and its WACC is 10%. What is the project's NPV? Project K costs $53,364.04, its expected cash inflows are $11,000 per year for 10 years, and its WACC is 13%. What i..
To what extent has the firm's financial results been affected by foreign currency adjustments in each of the past three years and are these adjustments significant
Ethier Enterprise has an unlevered beta of 1.15. Ethier is financed with 55% debt and has a levered beta of 1.65. If the risk free rate is 6% and the market risk premium is 5%, how much is the additional premium that Ethier's shareholders require to ..
Badlands, Inc. reports the following information for the year ended December 31: Units sold 640 units Sales price $120 per unit Direct materials $28 per unit Direct labor $9 per unit Variable manufacturing overhead $15 per unit. The operating income ..
Which of the following is considered to be the most risky?
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