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RAK, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest and taxes, EBIT, are projected to be $40,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $135,000 debt issue with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 11,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. Calculate the percentage changes in ROE when the economy expands or enters a recession. Assume the firm goes through with the proposed recapitalization. b-1 Calculate the return on equity (ROE) under each of the three economic scenarios Calculate the percentage changes in ROE when the economy expands or enters a recession Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. Calculate the percentage changes in ROE when the economy expands or enters a recession. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession.
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,250,000. The fixed asset falls into the three-year MACRS class (MACRS Table). What is the net cash flow of the project for the fol..
Agency Costs. What are agency costs? List some ways by which agency costs are mitigated.
What will be the shareholders’ required rate of return if management adopts these changes?
An Allied Northern preferred stock pays a $3.84 annual dividend. What is the value of the stock to an investor who requires a 9.5% return? What is the value of the share of stock of HOV Inc., to an investor who requires a 12% rate of return if HOV’s ..
XYZ company is expected to pay an $8 dividend one year from now and a $2 dividend two years from now. Two years from now immediately after the $2 dividend was paid, you also expect to be able to sell the stock at $16.50. If you have a required rate o..
Ferengi, Inc. is subject to an applicable corporate tax rate of 35 percent, and the weighted average cost of capital (WACC) of 12.5 percent. There is no specific time constraint on investment project payback requirements. What would be the NPV of Pla..
You are 25 now. You have got your first job and you want to plan for your retirement. You plan to work until you are 65 and then retire from work and expect to live for another 20 years. Assume you will be able to earn 8 percent return (interest) on ..
Stock A has an expected return of 12% and a standard deviation of 10.5%, and Stock B has an expected return of 20% and a standard deviation of 27.2%. The correlation coefficient between the two stock is -0.2. In order to produce the minimum risk port..
What percentage of the synergy do Namath shareholders receive in the cash offer?
A bond makes two $45 interest payments each year. Given that the bond's par value is $1,000 and its price is $1,050, calculate the bond's coupon rate and coupon yield.
What is the minimum annual number of machines (as an integer) that Company X must operate to make it economically feasible to build its own facility?
Stock options can be used to mitigate agency problems. Among their functions, financial markets provide pricing information.
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