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Monroe Inc. is an all-equity firm with 500,000 shares outstanding. It has $2,000,000 of EBIT, and EBIT is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per share (DPS), and its tax rate is 40%. The company is considering issuing $4,500,000 of 9.00% bonds and using the proceeds to repurchase stock. The risk-free rate is 4.5%, the market risk premium is 5.0%, and the firm's beta is currently 0.90. However, the CFO believes the beta would rise to 1.10 if the recapitalization occurs. Assuming the shares could be repurchased at the price that existed prior to the recapitalization, what would the price per share be following the recapitalization? (Hint: P0 = EPS/rs because EPS = DPS.)
An investor is forming a portfolio by investing $55,000 in stock A that has a beta of 1.33, and $75,000 in stock B that has a beta of 0.95. The market risk premium is equal to 6.30% and Treasury bonds have a yield of 4.25%. What is the required rate ..
Dharma supply has earnings before interest and taxes of $573,000, interest expenses of $335,000, and faces a corporate tax rate of 34%. What is Dharma Supply's net income? What would Dharma's net income be if it didn't have any debt?
Use the following returns for X and Y. Returns Year X Y 1 22.4 % 28.2 % 2 – 17.4 – 4.4 3 10.4 30.2 4 20.8 – 15.8 5 5.4 34.2. Calculate the average returns for X and Y. Calculate the standard deviations for X and Y.
A stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per annum (continuously compounded) for all maturities and the dividend yield on the index is 2.5%. Calculate values for u, d, and p when a 6-month time step is used. W..
At other casinos, the dealer is required to take a hit on soft 17, but must stay on all other hands with a value of 17, 18, 19, 20, or 21. For this situation, determine the probability of the ending value of the dealer's hand.
Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $9,953, $6,030, and $13,798 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determ..
Quarles Industries had the following operating results for 2015: sales = $27,960; cost of goods sold = $19,360; depreciation expense = $4,940; interest expense = $2,190; dividends paid = $1,050. What is the operating cash flow for 2015? What is the c..
A not-for profit nursing home has total expenses of $20 million. Sales tax in the state is 7%. Expenses are broken down into salaries ($12 million), supplies ($6 million), and pharmacy ($2 million). The benefit received by the nursing home from the s..
Strudler Real Estate, Inc., a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $380 million, but if the project is a failure, the firm will be wo..
Calculate the portfolio beta on the basis of the original cost figures. Calculate the percentage return of each asset in the portfolio for the year.
Conduct a current health insurance situation analysis for the Bedos. Be sure to assess the following: a. The after-tax costs of their current plans compared to purchasing an individual policy. b. The use of a tax-advantaged account as a health insura..
Your 68 year old mother plans to retire in 2 years and she expects to live independently for 3 years. She wants a retirement income that has, in the first year the same purchasing power as 60,000 has today. However her retirement income will be of a ..
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