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The Lopez-Portillo Company has $12.3 million in assets, 70 percent financed by debt and 30 percent financed by common stock. The interest rate on the debt is 8 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $26.5 million in assets. Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 11 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 35 percent. a. If EBIT is 9 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. (Round your answers to 2 decimal places.) b. What is the degree of financial leverage under each of the three plans? (Round your answers to 2 decimal places.) c. If stock could be sold at $20 per share due to increased expectations for the firm’s sales and earnings, what impact would this have on earnings per share for the two expansion alternatives? Compute earnings per share for each. (Round your answers to 2 decimal places.)
The 10-year $1,000 par bonds of Vail Inc. pay 15 percent interest. Determine the yield to maturity. Should you purchase the bond at the current market price?
You want to buy a car and have to finance $22,000. What will be the monthly loan payment?
A portfolio manager analyzes 100 stocks and constructs a mean-variance efficient portfolio using these 100 securities. How many estimates are needed to optimize this portfolio? Break down the variance of each stock to the systematic and firm-speci..
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What questions about her firm and about the potential sponsors should she contemplate?
A company currently pays a dividend of $1 per share (D0 = $1). It is estimated that the company's dividend will grow at a rate of 17% per year for the next 2 years, then at a constant rate of 8% thereafter. What is your estimate of the stock's curren..
Given the following information on Big Brothers, Inc. capital structure, compute the company’s weighted average cost of capital (WACC). The company’s marginal t
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You are offered the chance to participate in a project that produces the following cash flows: C0 C1 C2 + $ 5,800 + $ 4,400 − $ 12,600 The internal rate of return is 14.3%. If the opportunity cost of capital is 12%, what is the net present value of t..
Common stock valuelong dash—Variable growth. Newman manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just? completed, Grips earned ?$3.963.96 per share and paid cash dividends of ?$2.262.26 per share ?(D0equals..
Big brothers inc borrows $165315 from the bank at 6.52 percent per year compounded annually to purchase new machines. This loan is to be repaid in equal annual instalments at the end of each year over the next 3 years. How much will each annual payme..
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