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Edsel Research Labs has $27 million in assets. Currently, half of these assets are financed with long-term debt at 5 percent and half with common stock having a par value of $10. Ms. Edsel, the Vice-President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 5 percent. The tax rate is 30 percent. Under Plan D, a $6.75 million long-term bond would be sold at an interest rate of 11 percent and 675,000 shares of stock would be purchased in the market at $10 per share and retired. Under Plan E, 675,000 shares of stock would be sold at $10 per share and the $6,750,000 in proceeds would be used to reduce long-term debt How would each of these plans affect earnings per share? Consider the current plan and the two new plans.
Laura Lynn owns 20,700 shares of Global Exporters. Her shares have a total market value of $787,270. In total, the firm has 65,000 shares outstanding. Each share is entitled to one vote under the straight voting policy of the firm. How much more must..
A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 27,700 1 11,700 2 14,700 3 10,700 what is the NPV for the project if the required return is 12 per..
Charlie is retiring this year and has a $400,000 retirement fund to draw from that has an NAR of 2.25% compounded monthly. If Charlie plans to withdraw $2,000 at the end of each month, how many years would it last?
A company has arranged to borrow $200 million at LIBOR plus 20 basis points. Microsoft has entered into an interest rate swap so that Microsoft receives LIBOR and pays 7% under the swap. With the swap, what rate is their interest payment now?
Jenny Jenks has researched the financial pros and cons of entering into a 1-year MBA program at her state university. The tuition and books for the master’s program will have an up-front cost of $50,000. If she enrolls in an MBA program, Jenny will q..
Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 10 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has an embedded cost of 9 percent annually. ..
Which of the following will cause the value of a bond to increase, other things held the same?
Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz, and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $7.6 milli..
Buddy owns 100 of the outstanding shares of Binder Corporation stock. Buddy's basis in his Binder Corporation stock is $100,000. Binder Corporation is merged with Clipper Corporation in a tax-free reorganization. Buddy and Bruce each own 25% of Clip..
An unlevered firm has a value of $900 million. An otherwise identical but levered firm has $50 million in debt at a 5% interest rate. Its cost of debt is 5% and its unlevered cost of equity is 12%. After Year 1, free cash flows and tax savings are ex..
A stock has had returns of 17.52 percent, 12.36 percent, 6.36 percent, 27.82 percent, and −13.89 percent over the past five years, respectively. What was the holding period return for the stock?
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $244,000, has a four-year life, and requires $76,000 in pretax annual operating costs. System B costs $342,000, has a six-year life..
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