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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?
Wu Corporation has been offered a loan of $1,000,000 at a rate of 8.5%, simple interest, with monthly interest payments and a 365-day year. What would the effective interest rate be on this loan? If Wu's $1,000,000 loan had been 8.5%, add-on, payable..
The five Cs of credit are character, capacity, capital, collateral, and conditions. Review each of the four items mentioned in the article and then state which one of the Cs each would represent.
Debt capacity is often given as a reason for the value of the stock falling when equity is issued. The reason for this is:
What is the present value of all required payments under the lease contract? A check of the Auto Lease Guide (ALG) reveals an anticipated depreciation of 7% per annum, if the current price is $35,000 what is the anticipated future value of the car, i..
You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset.
Analysis of the financial statements and provide a recommendation as to whether XYZ should invest or not invest in this company.
Shareholder Wealth Maximization : TATA MOTORS & Nirma ratio analysis-Calculate and analyze the following thirteen financial ratios of the corporation and compare them to the appropriate industry average: Current ratio, Quick ratio
The U.S. Federal Reserve has kept interest rates at a very low level for the last 5 years. How do you think these low interest rates affect the price of U.S. stocks? What do you think will happen to the value of U.S. stocks when the U.S. Federal Rese..
You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.8, a debt-to-equity ratio of 0.3, and a tax rate of 30 percent. Based on this information, what is La..
research a company of your choice and locate the latest financial statements published by the company.for the following
Let's begin by discussing when job order costing systems would be more effective than a process costing system. Please give examples of types of businesses where each would be appropriate. Do these costing systems apply only to manufacturing?
It is well known that Investors generally do not like to bear risk. For two otherwise identical corporate bonds, the one with more idiosyncratic risk should have a price that is lower or the same?
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