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The unlevered firm expects to earn $250,000 in net operating income each year for the foreseeable future. It has a tax rate of 40% and has a capitalization rate of 8% equal to the industry required return for this type of firm. It calculates that there is a 10% chance the firm will fall into bankruptcy in any given year and that, if bankruptcy does occur, it will impose direct and indirect costs totaling $48,000. Assume that, in the event of bankruptcy, the firm will reorganize and continue operations indefinitely, with a constant 10% probability of reentering bankruptcy. If necessary, use the industry required return for discounting bankruptcy costs. Assume that the firm considers borrowing $500,000 debt at an interest rate 5% and use the proceeds to repurchase an equal amount of outstanding stock. With this level of debt, the likelihood of falling into bankruptcy in any given year increases to 15%, and if bankruptcy occurs then it will impose direct and indirect costs totaling $48,000. What is the present value of the interest tax shields for the levered firm if the proposed $500,000 debt is used?
Assume that the corporate tax rate is 34% and the personal tax rate is 30%. The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation. What is the difference in the percentage of the firm's..
Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $0.50 coming 3 years from toda..
A company issues a common stock to the public for $35.00. The expected dividend and growth in dividends are $2.08 per share and 6.60%, respectively. If the flotation cost is 13.60% of the issue's gross proceeds, what is the cost of external equity, r..
A coin that was featured in a famous novel sold at auction in 2014 for $9,179,000. The coin had a face value of $20 when it was issued in 1793 and had previously been sold for $220,000 in 1970. What annual rate did the 1970 buyer earn on his purchase..
Suppose that a manufacturer has an ongoing need for silver as a raw material in the production process, and is concerned about the risk of the price of silver going up. Two hedging choices being considered are futures contracts and options. discuss t..
Prepare a depreciation schedule for the assets in the following transactions using the straight line method of depreciation: Analyze the results.
Income statement preparation On December 31, 2015, Cathy Chen, a self-employed certified public accountant (CPA), completed her first full year in business. During the year, she billed $360,000 for her accounting services. She had two employees, a bo..
Shares of SoHot Donuts common stock are currently selling for $15. Next year’s dividend is expected to be $1.50 per share and the market rate of return is 13%. At what rate is the dividend projected to be growing?
Consider two all-equity financed firms (Bright Prospect and Past Glory), both with book value per share of $10, both with market capitalization rate of 15% and earning retention ratios of 0.6. Bright Prospect has an ROE of 20%. Calculate the price of..
Computer stocks currently provide an expected rate of return of 16%. MBI, a large computer company, will pay a year-end dividend of $2 per share. If the stock is selling at $50 per share, what must be the market's expectation of the growth rate of MB..
A bond trader purchased each of the following bonds at a yield to maturity of 6%. Immediately after she purchased the bonds, interest rates fell to 5%. What is the percentage change in the price of the following bond after the decline in interest rat..
Calculate the current price of a $1,000 par value bond that has a coupon rate of 11 percent, pays coupon interest semi-annually, has 21 years remaining to maturity, and has a current yield to maturity (discount rate) of 21 percent.
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