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Consider a firm with an EBIT of $856,000. The firm finances its assets with $2,560,000 debt (costing 8.1 percent) and 460,000 shares of stock selling at $7.00 per share. To reduce the firm’s risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 260,000 shares of stock. The firm is in the 35 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $856,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS
L.A. Clothing has expected earnings before interest and taxes of $2,300, an unlevered cost of capital of 14 percent and a tax rate of 34 percent. The company also has $3,100 of debt that carries a 7 percent coupon. The debt is selling at par value. W..
Suppose you buy a 9.4 percent coupon bond today for $1,120. The bond has 5 years to maturity. What rate of return do you expect to earn on your investment? Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. W..
A bond with a face value of $1,000 matures in 9 years and has a 7% semiannual coupon. The bond currently sells for $846. You would pay $846 for each bond if you think that a “fair” market interest rate (discount rate) for such bonds is ____. (hint: f..
Suppose there are two states that do not trade: Iowa and Nebraska. Each state produces the same two goods: corn and wheat.
Calculate the annual cash flows (annuity payments) from a fixed-payment annuity if the present value of the 20-year annuity is $2 million and the annuity earns a guaranteed annual return of 10 percent.
Find the value of a British consol that pays $25 per year in perpetuity. The interest rate on investments of comparable risk is 5.2%. What is the present value of an investment that will pay $100 per year forever if the required rate is 10%?
A company has derivatives transactions with Banks A, B, and C that are worth +$20 million, -$15 million, and -$25 million, respectively, to the company. The transactions are cleared bilaterally and are subject to one-way collateral agreements where t..
Calculate the expected NPV for both projects. - Calculate the variance and standard deviation of the NPVs for both projects. Which project appears to be riskier?
Finance text books normally discuss many different financial ratios. Such as liquidity ratios and the rest. What is their purpose? Can any ratio or combination of ratios predict a company's long-term viability? Can you think of an example whereby o..
Project H requires an initial investment of $100.,000 and produces annual cash flows of $50,000, $40,000, and $30,000. The projects are mutually exclusive. The company accepts projects with payback periods of 3 years or less.
X Corp issues a bond on March 1, 2014 with a maturity date of February 28, 2024. what happens to the excess?
For this discussion, assume that you are an investor and considering the buyout of an existing publicly traded company. There are several areas you plan to focus on during your due diligence process in order to determine the organization's potential ..
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