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EBIT and Leverage. Kaelea, Inc., has no debt outstanding and a total market value of $125,000. Earnings before interest and taxes, EBIT, are projected to be $10,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $42,000 debt issue with a 6 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 6,250 shares outstanding. Ignore taxes for this problem.
a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a recession.
b. Repeat part (a) assuming that Kaelea goes through with recapitalization. What do you observe?
If a teacher decides to sell hs own textbook. It will retail at $275 for a new book, and he will receive a 45% royalty for each book sold. However, he will have to pay the publisher an upfront one-time book processing charge of $37,000. If the teache..
Rimsa Savings is a savings institution that provided Carson Company with a mortgage for its office building. Rimsa recently offered to refinance the mortgage if Carson Company will change to a fixed-rate loan from an adjustable-rate loan.
With a 30 year 9% loan of $200,000, how much of your yearly payment would be interest and how much would be principal for the first 4 years? Calculate the following : payment, interest, principal, loan balance(E.O.Y.), for each year.
Compute the payback statistic for Project A and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 8 percent and the maximum allowable payback is four years.
What managerial assessments may you make about an organization that has a profit and negative cash flow in the same accounting period. How might this affect the organization
Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement date?
Julio purchased a share one year ago for $27. The share is now worth $32, and the total return to Julio for owning the share was 37 per cent. What is the dollar amount of dividends that he received for owning the share during the year?
Calculate the future value of $5,000 invested today for 6 years if your investment pays 4% compounded annually - Calculate the present value of $3,000 received 8 years from today - Calculate the expected rate of return for each stock separately.
electrical utility is offering a security known as zero coupon bond for sale. the terms of the security are investors
What is dollar cost averaging? If you were an astute investor at timing market moves, would you want to use dollar cost averaging?
From October 2007 to March 2009, the market declined about 57%. It then advanced in 1 year about 69%. Determine by calculations if investors were ahead after the advance or not?
Five years ago you borrowed 200,000 to finance the purchase of a 240,000 home. The interest rate on this (old) mortgage is 10% MEY, and the level payments were made monthly to amortize the loan over 30 years (you did not curtail the loan in any way, ..
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