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Santos Unlimited (SU) was originally unlevered with 4900 shares outstanding. However, after a major financial restructure, SU now has $36000 of debt, with an annual interest expense of 10 percent. The restructuring has reduced the number of shares to 3500. A group of shareholders of SU are not convinced that this move towards adopting financial leverage is a good idea. Their main argument is that there is now some range of EBIT, however low, that will make the shareholders worse off than before. Help understand the situation better by computing the level of earnings before interest and tax (EBIT) that would make shareholders indifferent between being unlevered (i.e. not having any debt) and levered (i.e. having debt). Assume a 30 percent corporate tax rate.
A host of empirical evidence indicates that the gains from a typical merger accrue to the shareholders of the target corporation, not to the shareholders of the acquiring corporation. It seems the acquiring corporation should be in the "driver’s seat..
John owns Corporation A and Corporation B and is a personal guarantor for Corporation A.
The initial investment in the project will be $21 million, and the investment will be depreciated straight line, down to a salvage value of $9 million at the end of the fourth year. The revenues are expected to be $24 million next year and to grow 5%..
Suppose two workers earn labor incomes of $20,000 per year in each of three years. One worker saves 20 percent of her labor earnings in each of the first two periods, and spends all her savings and accumulated interest in the final period. Calculate ..
Springfield mogul Montgomery Burns, age 70, wants to retire at age 100 so he can steal candy from babies full time. Once Mr. Burns retires, he wants to withdraw $1.2 billion at the beginning of each year for 6 years from a special offshore account th..
If the cost of a credit check is 5% of the value of the loan and the bank is risk neutral, should the bank go ahead with the new policy?
Suppose a? seven-year, $1,000 bond with a 8.14% coupon rate and semiannual coupons is trading with a yield to maturity of 5.75%.
Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, national debt, and the Fed’s monetary policy, political conditions, and the general mood of investors. Based on these pr..
How does bond price change with the bond term? What is the difference between the dirty price and the clean price of a bond?
What is the project's coefficient of variation?
Suppose you purchase five put contracts on Testaburger Co. The strike price is $54, and the premium is $3. If, at expiration, the stock is selling for $47 per share, what are your put options worth? What is your net profit?
Free Cash Flow Iron Ore Corp. reported free cash flows for 2008 of $106 million and investment in operating capital of $189 million. Iron Ore listed $39 million in depreciation expense and $51 million in taxes on its 2008 income statement. What was I..
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