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Santos Unlimited (SU) was originally unlevered with 4000 shares outstanding. However, after a major financial restructure, SU now has $39000 of debt, with an annual interest expense of 8 percent. The restructuring has reduced the number of shares to 3800. A group of shareholders of SU are not convinced that this move towards adopting financial leverage is a good idea. Their main argument is that there is now some range of EBIT, however low, that will make the shareholders worse off than before. Help understand the situation better by computing the level of earnings before interest and tax (EBIT) that would make shareholders indifferent between being unlevered (i.e. not having any debt) and levered (i.e. having debt). Assume a 30 percent corporate tax rate.
Place your answer to the nearest dollar without a dollar sign or a comma (if applicable).
Find the price of a $1000 par value 10-year bond with coupons at 8.4% convertible semi-annually, which will be redeemed at $1050. The bond is bought to yield 10% convertible semi-annually for the first five years and 9% convertible semi-annually for ..
You’re trying to save to buy a new $175,000 Ferrari. You have $28,000 today that can be invested at your bank. The bank pays 3.5 percent annual interest on its accounts. How long will it be before you have enough to buy the car?
There are numerous critics of both the World Bank and the IMF. Chief among them is Joseph Stiglitz, nobel laureate.
The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long position. When the position is closed the futures price is $930.32. If there are no settlement requirements, what is your percentage gain or loss under a 15.0% ..
Suppose I wish to start my own delivery service. I buy a light truck for $75,000. At the end of year zero, I purchase the truck with a 3 year loan, with 20% down, at an interest rate of 9%. Payments are scheduled to be made at the end of years 1, 2, ..
A business borrows $320,355 for 10 years at an annual rate of interest of 6.9%. If payments are annual and the loan will negatively amortize by $35,547, what will be the annual payment required? Put your answer in as a positive number.
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.43 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $1,990,000 in annual sales, ..
Why should companies use a project's net cash flows rather than its accounting income when determining a projects NPV? What are the major types of project risk? What three techniques are used to assess project's risk?
What is the average annualized geometric return over the period? What is the arithmetic average annual return over the period?
You plan to buy a house in 10 years. You want to save money for a down payment on the new house. You are able to place $406 every month at the end of the month into a savings account at an annual rate of 7.07 percent, compounded monthly. How much mon..
Most ARMs have rate caps and/or debt service caps. What’s the difference between a rate cap and a debt service cap? In general, why do lenders front load fees and points rather than amortizing them over the life of a loan? Name three cash expenditur..
What is the company’s WACC?
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