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Amarillo Parts is considering purchasing a small firm in the same line of business. The purchase would be financed by either the sale of common stock or by a bond issue. The financial manager wants to evaluate how the two alternative financing plans will affect the earnings potential of the firm. Total financing required is $4.5 million. The firm currently has $20,000,000 of 12 percent bonds and 600,000 common shares outstanding. The firm can arrange financing of the $4.5 million through a 14 percent bond issue or the sale of 100,000 shares of common stock. The firm has a 40 percent tax rate.
(a) What is the degree of financial leverage for each plan at $7,000,000 of EBIT?
(b) What is the financial breakeven point for each plan?
Mooradian Corporation's free cash flow during the just ended year (t=0) was $180 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5 % what is the firm’s total corporate ..
Kennedy Air Services is now in the final year of a project. The equipment originally cost $29 million, of which 90% has been depreciated. Kennedy can sell the used equipment today for $7.25 million, and its tax rate is 30%. What is the equipment's af..
Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.00 million. This investment will consist of $2.00 million for land and $10.00 million for trucks..
ABC Corp. just issued some new preferred stock. The issue will pay a $3 quarterly dividend in perpetuity, beginning 12 years from now. If the market requires a 8% return on this investment, how much does a share of preferred stock cost today?
How would each of the following scenarios affect a firm's cost of debt Rd(1-T), its cost of equity, Rs, and its WACC? Indicate with a plus(+), a minus (-) or a zero (0) if the factor would raise, would lower or would have an undeterminable effect on ..
Stock in Dragula Industries has a beta of 1.8. The market risk premium is 5 percent, and T-bills are currently yielding 4.80 percent. The company’s most recent dividend was $2.00 per share, and dividends are expected to grow at a 5.0 percent annual r..
Aggressive investors will invest more in the tangent portfolio choosing a portfolio that is near the tangent portfolio or even beyond it by buying stocks on margin. Only aggressive investors will choose to hold the tangent (or efficient) portfolio of..
Discuss the concepts of marginal product and marginal cost. Also discuss the importance of trends in these and other economic measures and how time-series analysis (trend analysis) can be used or misused to make important management decisions.
One year ago, you purchased a stock at a price of $32 a share. Today, you sold the stock and realized a total return of 25 percent. Your capital gain was $6 a share. What was your dividend yield on this stock?
A decision by foreign central banks to sell their folding of U.S. treasury bonds will
Mary Jarvis is a single individual who is working on filing her tax return for the previous year. She has assembled the following relevant information. What is Mary’s federal tax liability? What is her marginal tax rate?
One drawback of switching from a partnership to the corporate form of organization is the following:
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