Reference no: EM1343832
1. AQ&Q has EBIT of $2million, total assets of $10,000, stockholders equity of $ 4 million, and pretax interest expense of 10 percent.
a. What is AQ&Q's indifference level of EBIT?
b. Given its current situation, might it benefit from increasing or decreasing its use of debt? Explain.
c. Suppose we are told AQ&Q average tax rate is 40 percent, how does this affect your answer to (a) and (b)?
2. Stern's Stews, Inc., is considering a new capital structure. Its current and proposed capital structures are,
Current Proposed
Total assets $150 million $150million
Debt 25 million 100million
Equity 125 million 50million
Common stock prices $50 $50
Number of shares 2,500,000 1,000,000
Interest rate 12% 12%
Sterns' Stew's president expects next year's EBIT to be $20 million, but may be 25 percent higher or lower. Ignoring taxes, perform EBIT/eps analysis. What is indifference level of EBIT? Should Stern's Stews change its capitals structure? Why or Why not?
3. Suppose the Quick Towing Company purchases a new tow truck. The old truck had a book value of $1,000.00 and was sold for $1,420. If Quick Towing is in the 34 percent marginal tax bracket, what is the tax liability on the sale of the truck? What is the after tax cash flow on the sale?
4. The no shoplift Security Company is interested in bidding on a contract to provide a new security system for a large department store chain. The new security system would be phased into 10 stores per year for five years. No shoplift can purchased the hardware for $50,000 per installation. The labor and material cost per installation is approximately $15,000.00. In addition, no shoplift will need to purchase $100,000 in new equipment for the installation, which will be depreciated to zero using the straight line method over five years. This equipment will be sold in five years for $25,000. Finally, an investment of $50,000 in net working capital will be needed. Assume that the relevant tax rate is 34 percent. If the no shoplift Security Company requires a 10 percent return on its investments, what price should it be?
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