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EBIT and Leverage. Kaelea, Inc., has no debt outstanding and a total market value of $125,000. Earnings before interest and taxes, EBIT, are projected to be $10,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $42,000 debt issue with a 6 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 6,250 shares outstanding. Ignore taxes for this problem. a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a recession. b. Repeat part (a) assuming that Kaelea goes through with recapitalization. What do you observe?
Precise Machinery is analyzing a proposed project. The company expects to sell 2,340 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a..
What was the average nominal risk premium on the stock? What was the average real return on the stock?
St Hubbins Industrial Technologies (StHIT) predicts that earnings in the coming year will be $45 million. There are 12 million shares outstanding and StHIT maintains a D/E ratio of 2.0. The firm’s value is $300 million. Calculate the maximum investme..
An appliance for less is a local appliance store. It costs the store $2.4 per unit annually for storage, insurance act. To hold microwave in their inventory. Sales this year are anticipated to be 632 units. Each order costs $21. The company is using ..
A machinery upgrade project will cost $14 million, and produce cost savings of $1 million in perpetuity.
Calculate the future value of $1,000, given that it will be held in the bank for 7 years and earn an annual interest rate of 7 percent
What is your predicted price of the bond after the decline in interest rate?
Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments.
What was the company’s cash coverage ratio for the year?
The market price of the firm’s preferred stock is $116.00. The preferred pays a 12.1% annual dividend on its $100 par value. Floatation costs are $4 per share. What is the cost of preferred equity if floatation costs are ignored?
Describe how to calculate the future value of a series of cash flows. Describe the five inputs to a time value of money problem?
Because the expected return of asset A is identical to the risk free asset, by law of one price, price of asset A must be identical to price of risk free asset
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