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Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in? Dallas, Houston, and San Antonio. To finance the new venture two plans have been? proposed: Plan A is an? all-common-equity structure in which $2.4 million dollars would be raised by selling 90,000 shares of common stock. Plan B would involve issuing ?$1.4 million in? long-term bonds with an effective interest rate of 12.2 percent plus another$ 1.0 million would be raised by selling 45,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity? date, in that this amount of financial leverage is considered a permanent part of the? firm's capital structure.
Abe and his partners plan to use a 35 percent tax rate in their? analysis, and they have hired you on a consulting basis to do the? following:
a. Find the EBIT indifference level associated with the two financing plans.
b. Prepare a pro forma income statement for the EBIT level solved for in part a that shows that EPS will be the same regardless whether Plan A or B is chosen.
The Caughlin Company has a long-term debt ratio of .43 and a current ratio of 1.50. Current liabilities are $990, sales are $6,410, profit margin is 9.3 percent, and ROE is 20.4 percent. What is the amount of the firm’s net fixed assets?
What would the Federal Reserve System's account manager need to do to maintain the target federal funds rate?
A firm has net working capital of $430, net fixed assets of $2,176, sales of $5,400, and current liabilities of $740. How many dollars worth of sales are generated from every $1 in total assets?
Ten years ago you invested $1,000 for 10 shares of Providien, Inc. common stock. You sold the shares recently for $2,000. While you owned the stock it paid $10.08 per share in annual dividends. What was your rate of return on Providien stock?
Identify and briefly describe the three classic theories of the term structure of interest rates. Identify and describe four of the six components of nominal interest rates as supported by modern term structure theory.
You are considering two insurance settlement offers. The first offer includes annual payments of $4,500, $6,800, and $10,125 over the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decid..
Explain what motivation is and the benefit for organizations to have motivated employees. In addition, identify and describe the most valuable asset an organization has and how they keep them motivated.
A 7-year annuity of 14 $8,600 semiannual payments will begin 9.5 years from now, with the first payment coming 10 years from now. If the discount rate is 10 percent compounded semiannually, what is the value of this annuity seven years and five years..
One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $155,000 today. The market value today of the current machine is ..
You are in the process of buying a house. Your mortgage lender reviewed your credit score, employment history, debt-to-income ratio, and available funds you’ve set aside for the down payment. Which of the two is a better financing decision, and why? ..
A bond is scheduled to mature in two years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent. What is the bond's price? What is the duration of the bond? Calculate the perc..
Lowell Trucking Corporation is planning to purchase a new truck. The cost of the new truck will be $100,000. The new truck will be used for six years, but will require major repairs every two years at a cost of $25,000 each time. What is the NPV and ..
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