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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.
a-1. How would each of these plans affect earnings per share? Consider the current plan and the two new plans. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)
Current____
Plan A____
Plan B_____
What is the difference between the two firms' ROEs?
How do you explain the use of net present value (NPV) in business? What considerations are made when calculating NPV?
When a project's NPV exceeds zero, the project will always be accepted when payback period method is used. the IRR should be calculated to insure that the project's projected rate of return exceeds the cost of capital.
Project S costs $2100 up front, and its expected net cash inflows are $840 per year for 8 years (with the first inflow occurring one year from today). If the WACC is 11% the project's NPV is $_________. Project L costs $3600, its expected cash inflo..
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