Financing plan instead of the more conservative plan

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Reference no: EM131884044

1. Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. Its tax bracket is 40%. If the firm uses short-term debt, its rate will be 7.5%, and if it uses long-term debt, its rate will be 9%. By how much will their earnings after taxes change if they choose the more aggressive financing plan instead of the more conservative plan? (Please Explain Work To Get Answer)

A. $10,800

B. ($10,000)

C. ($6,000)

D. $6,000

2. You are a financial advisor to client John Smith, who will invest only in bonds. You have on offer to him a $1000 bond (par) good for 25 years with a 9% coupon rate. This looks good so far but if he requires a YTM of 7.6% how much is the bond worth to him? Would you recommend he purchase it?

Reference no: EM131884044

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