User Account

All Pages

Debt outstanding and total market value

Assignment Help Financial Management
Reference no: EM13934445

RAK, Inc., has no debt outstanding and a total market value of $240,000. 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 18 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $150,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 15,000 shares outstanding. RAK has a tax rate of 35 percent.

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 answers to 2 decimal places, e.g., 32.16.)

2) 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. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

3) 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 answers to 2 decimal places, e.g., 32.16.)

4) 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. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Reference no: EM13934445

Questions Cloud

Calculate the economic order quantity : Louise Manufacturing uses 3,100 switch assemblies per week and then reorders another 3,100. The relevant carrying cost per switch assembly is $13.00, and the fixed order cost is $1,550. Calculate the economic order quantity.
Characteristics of effective managers and leaders : an analysis of how management and leadership roles differ in terms of supporting an organization to set and achieve goals. Provide your rationale, identifying specific characteristics of effective managers and leaders
Best estimate of the value of this income property : Income Property Valuation: Given that a property has the following information: a potential gross income of $1,550,000, net operating income of $900,000, a market capitalization rate of 8.25%, and a market gross income multiplier (GIM) of 11, what is..
Promoting child and adolescent health outcomes in australia : Identify the current status of child and youth health and wellbeing in Australia (birth to 24 years) in your selected priority direction and present the problem currently faced in Australia.
Debt outstanding and total market value : RAK, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percen..
Discuss the effect this might have on the selection : Some modern, capital-intensive production facilities have significantly reduced the proportion of direct labor cost to total production cost.
Analyse the obesity childhood in the uk : Analyse the obesity childhood in the uk as a health problem, then analyse three effects of this problem on children and give a possible solution for each effect.
What were the probable causes of undervaluation : The Argentine peso was fixed through a currency board at Ps1.00/$ throughout the 1990s. In January 2002, the Argentine peso was floated. On January 29, 2003 it was trading at Ps3.20/$. y what percentage was the Argentine peso undervalued? What were t..
Possesses some finite amount of magical energy : A spellcaster is given an object (e.g. mouse, owl, dwarf, purse ...) and a set of spells that she / he can use to transform the object. The effect of each spell is described by a set of from-to pairs. For example, spell "Chiroptera" may transform ob..

Reviews

Write a Review

Financial Management Questions & Answers

  Yield to maturity of bond

Consider a 20 year, $1000 bond with a coupon rate of 9% and quarterly coupons. By looking at Bloomberg you can see that this bond has most recently traded at a price of $1462.62. Give two numbers (a,b) such that the yield to maturity of bond is betwe..

  Dividend on stock-what is the current share price

Estes Park Corp. pays a constant $8.30 dividend on its stock. The company will maintain this dividend for the next 14 years and will then cease paying dividends forever. If the required return on this stock is 12 percent, what is the current share pr..

  Directly produce any sales but will reduce operating costs

Thornley Machines is considering a 3-year project with an initial cost of $690,000. The project will not directly produce any sales but will reduce operating costs by $405,000 a year. The project will require $17,000 in extra inventory for spare part..

  Review the financial statements of merck and novartis

Review the financial statements of Merck and Novartis to learn additional information. The emphasis of this Case is to review the income statement, balance sheet and computation of ratios.

  Purchase new equipment for its dermatology unit

Harper Hospital is trying to decide whether to lease or purchase new equipment for its dermatology unit. The lease would require payments of $1,000 at the beginning of each month for five years. If purchased, the equipment would have a useful life of..

  Some of the financial ratios from the annual report

Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 5% and IR 5%. A stock with a beta of 1 on IP and 0.7 on IR currently is expected to provide a rate..

  What is the dollar amount of taxes paid

Energizer Battery Manufacturers had sales of $2,000,000 in 2010 and their cost of goods sold represented 75 percent of sales. Selling and administrative expenses were 10 percent of sales. Depreciation expense was $100,000 and interest expense for the..

  Calculate the pay back period of each project

Calculate the Pay Back Period (PBP) of each project, assess its acceptability, and indicate which project is best using NPV. Calculate the Internal Rate of Return (IRR) of each project, assess its acceptability.

  Considering investing in a project with a beta coefficient

Mr. Johnson is considering investing in a project with a beta coefficient of 1.35. What would you recommend if this investment has an 11.5 percent rate of return, risk-free rate is 2.5 percent, and the rate of return on the market portfolio of assets..

  What is the estimated value of this stock today

A company is expected to pay their first annual dividend 2 years from now. That payment will be $1.50 a share. Starting in Year 3, the company will increase the dividend by 5% per year. The required return from common shareholders is 15%. What is the..

  What is jensens cost of preferred stock

Jensen's Travel Agency has 8 percent preferred stock outstanding that is currently selling for $55 a share. The market rate of return is 10 percent and the firm's tax rate is 34 percent. What is Jensen's cost of preferred stock?

  According to the efficient markets hypothesis

According to the efficient markets hypothesis, professional investors will earn: excess profits over the long-term. a dollar return equal to the value paid for an investment. excess profits, but only on short-term investments. a return that "beats th..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd