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You have been asked by JJ Corporation, a California- based firm that manufacturers and services digital satellite TV systems, to evaluate its capital structure. They currently have 70 million shares outstanding trading at $10 per share. In addition, the company has 500,000 bonds, with a coupon rate of 8%, trading at $1000 per bond. JJ is rated BBB and the interest rate on BBB straight bonds is currently 10%. The beta for the company is 1.2, and the current risk-free rate is 6%, the market risk premium is 5%. The tax rate is 40%.
JJ Corporation is proposing to borrow $250 million and use it for the following purposes:
Buy back $100 million worth of stock.
What will the value of the firm be after this additional borrowing? (assuming zero growth, and that the debt is perpetual)
You want to buy a house, and you can make an initial payment of $20,000 and can afford monthly payments of at most $1,500. If the APR on variable-rate mortgage loans is 3.6% and you finance the purchase over 30 years, what is the maximum price you ca..
Johnny Cake Ltd. has 8 million shares of stock outstanding selling at $17 per share and an issue of $40 million in 10 percent annual coupon bonds with a maturity of 18 years, selling at 92.5 percent of par. Assume Johnny Cake’s weighted-average tax r..
Adams operates his $30000 firm using his own equity. Bob operates his firm with $15000 of his own money plus $15000 of debt at a cost of 12 percent interest. Calculate Adams's and Bob's return on equity if their respective businesses produce earnings..
Skillet Industries has a debt–equity ratio of 1.3. Its WACC is 7.1 percent, and its cost of debt is 6.6 percent. The corporate tax rate is 35 percent. What is the company’s unlevered cost of equity capital? What would the cost of equity be if the deb..
The Corner Store has sales of $72,510, total assets of $60,400, a debt-equity ratio of 1.2, and a profit margin of 3 percent. What is the equity multiplier?
The most recent financial statements for Summer Tyme, Inc., are shown here: Income Statement Balance Sheet Sales $4,100 Current assets $4,900 Current liabilities $890 Costs 2,500 Fixed assets 6,000 Long-term debt 3,590 Taxable income $1,600 Equity 6,..
What is the probability that this project will be acceptable to BBW, if the goal is to maximize shareholder wealth? What other factors might be important in your analysis? Be specific.
Which one of the following best illustrates the concept of derived demand?
Lohn Corporation is expected to pay the following dividends over the next four years: $20, $16, $15, and $8.50. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 1..
If Bonnie is in a 35% marginal tax bracket for federal income tax purposes, what are the tax consequences of her ownership and sale of the bonds?
Small businesses, those with less than 500 employees, represent over 99 percent of all employers, and account for about one-half of the gross domestic product in the United States.
In 2011, a running back signed a contract worth $70.9 million. The contract called for $11.5 million immediately and a salary of $4.3 million in 2011, $11.1 million in 2012, $11.5 million in 2013, $10.2 million in 2014 and 2015, and $12.1 million in ..
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