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Two incentive entrepreneurs have interested a group of venture capitalists in backing a new business project. The proposed plan would consist of a series of international retail outlets to distribute and service a full line of ingenious home garden tools. The stores would be located in high-traffic cities in Latin America such as Panama City, Bogota, Sao Paulo, and Buenos Aires. Two financing plans have been proposed by the entrepreneurs. Plan A is an all-common-equity structure. Five million dollars would be raised by selling 160,000 shares of common stock. Plan B would involve the use of long-term debt financing. Three million dollars would be raised by marketing bonds with an effective interest rate of 14 percent. Under the alternative, another $2 million would be raised by selling 64,000 shares of common stock. With both plans, $5 million is needed to launch the new firm's operations. The debt funds raised under plan B are considered to have no fixed maturity date, because this portion of financial leverage is thought to be a permanent part of the company's capital structure. The two promising entrepreneurs have decided to use a 35 percent tax rate in their analysis, and they have hired you on a consulting basis to do the following:
a. Find the EBIT indifference level associated with the two financing proposals.
b. Prepare income statements for the two plans that proves EPS will be the same regardless of the plan chosen at the EBIT level found in part a.
If the liquidity theory is correct, what should the current rate be on 2-year Treasury securities?
The Corporation forecasts that its sales will increase by 10% in the next year and its operating costs will rise in proportion to sales. The corporation interest expense is expected to remain at $200 million,
Using the key value driver formula, what is the enterprise value in each scenario? If each scenario is equally likely, what is the enterprise value for the company?
Backwards has $305 million of debt outstanding at an interest rate of 9 percent and $818 million of equity (market value) outstanding. What is the expected return on the equity with this capital structure?
Assume that retained earnings increased by $400,000 from December 31, 2011, to December 31, 2012, for Jarvie Distribution Corporation. During the year, a cash dividend of $135,000 was paid.
Why is time value of money concept important? In what quantitative decisions may the time value of money be used? How do you apply the time value of money concept to make decisions in your personal life? How may you use Time Value of Money concept..
Repeat the process but assume that the second share was purchased for $110 instead of $130. Why do the rates of return differ?
Computation of yield to maturity and yield to call
What is the duration of this liability to the couple if they can borrow and lend at the market interest rate of 9 percent?
What impact does number of years till maturity have on the value of bond? Mention three capital budgeting methods (decision rules) and rank them from least to most useful. Defend your ranking.
Construct Green's market-value balance sheet before the announcement of the debt issue. What is the price per share of the firm's equity? Construct Green's market-value balance sheet immediately after the announcement of the debt issue.
Suppose you're a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting ?0.7627/$1.00 and Credit Suisse is offering SF1.1806/$1.00.
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