Reference no: EM131005268
1. ABC and XYZ are identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 10%. Both firms expect EBIT to be $95,000 and all income will be distributed as dividends. Ignore taxes.
a. Richard owns $30,000 worth of XYZ stock. What rate of return is he expecting?
b. Show how Richard could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage
c. Now assume ABC and XYZ each pay a 20% marginal corporate tax, but Richard pays no taxes. Repeat a) and b). How is the outcome different than in a) and b)? Explain. Which firm would Richard prefer to invest in? Why?
d. Now assume ABC and XYZ each pay a 20% marginal corporate tax, and Richard pays a 15% tax on dividends. Repeat a) and b). How is the outcome different than in a), b), and c)? Explain. Which firm would Richard prefer to invest in? Why?
2. Shadow Corp. has no debt but can borrow at 7%. The firm's WACC is currently 11%, and the tax rate is 35%.
a. What is Shadow's cost of equity?
b. If the firm converts to a 25% debt-to-equity ratio, what will its cost of equity be?
c. What is Shadow's WACC after it converts to the 25% debt-to-equity ratio?
d. Assume that converting to the 25% debt-to-equity ratio does not significantly increase Shadow Corp.'s probability of bankruptcy. Should Shadow Corp. convert to the new capital structure? Explain.
|
What is the medicare trust fund
: Medicare Solvency - Submit a paper that examines the Medicare Trust Fund and its projected solvency. Some key questions to consider: What is the Medicare Trust Fund? What is the current state of the fund
|
|
Describe office management tasks
: If a person imperils himself or herself unnecessarily to danger and is injured, the defense in a liability suit may claim: Office management tasks include all of the following except
|
|
Cook uses the straight line method of depreciation
: Assuming the land had a fair value on January 1, 2011, of $200,000 and could be leased alone for $30,000, prepare journal entries for Cook Textiles for 2011.
|
|
How far had car traveled by the time it reached given speed
: The accompanying table shows time-to-speed data for a particular car accelerating from rest to 130 mph. How far had the car traveled by the time it reached this speed?
|
|
Determining the marginal corporate tax
: Now assume ABC and XYZ each pay a 20% marginal corporate tax, and Richard pays a 15% tax on dividends. Repeat a) and b). How is the outcome different than in a), b), and c)? Explain. Which firm would Richard prefer to invest in? Why?
|
|
Definition of a bargain purchase option
: The additional disclosures necessary in the notes to the financial statements if the operating lease has a lease term greater than one year.
|
|
Shares of stock at the current stock price
: Looking forward to next year, if Digby's current cash balance is $19,378 (000) and cash flows from operations next period are unchanged from this period, and Digby takes ONLY the following actions relating to cash flows from investing and financin..
|
|
Alternatives for outsourcing a service
: 1. Create a simple decision table that might be used to decide between three alternatives for outsourcing a service for a city government (You will have to fabricate amounts)
|
|
Identify the criteria that you will use for the audit
: Identify the criteria that you will use for the audit. These criteria will become the benchmarks that you will later use for evaluating the organization's diversity initiatives.
|