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Homemade Leverage [LO 1] FCOJ, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 35 percent debt. Currently, there are 5,000 shares outstanding and the price per share is $47. EBIT is expected to remain at $16,500 per year forever. The interest rate on new debt is 7 percent, and there are no taxes. Required: (a) Melanie, a shareholder of the firm, owns 280 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Shareholder cash flow $ (b) What will Melanie’s cash flow be under the proposed capital structure of the firm? Assume that she keeps all 280 of her shares. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Shareholder cash flow $ (c) Suppose FCOJ does convert, but Melanie prefers the current all-equity capital structure. Show how she could unlever her shares of stock to recreate the original capital structure. Number of shares stockholder should sell
Mercury Skateboard Company manufactures skateboards. Several weeks ago, the firm received a special-order inquiry from Venus, Inc. Venus desires to market a skateboard similar to one of Mercury's and has offered to purchase 11,000 units if the order ..
An industrial firm can purchase a special machine for $20,000. A down payment of $2,000 is required and the balance can be paid in 5 equal year-end installments plus 7% interest on the unpaid balance. As an alternative the machine can be purchased fo..
The Estrada Company uses cost-plus pricing with a 0.30 mark-up. The company is currently selling 100,000 units at $12 per unit. Each unit has a variable cost of $3.30. In addition, the company incurs $183,300 in fixed costs annually. If demand falls ..
What are the basic arguments for increasing capital requirements at large commercial banks? In what ways will depositors, stockholders, and society in general benefit? How might each group be disadvantaged? As commercial banks enter new lines of busi..
From one year to the next for an investment, the average collection period increases with sales flat, and inventory turns increase. Looking at net cash flow, accounts receivable will _____ cash flow and inventory will _____ cash flow?
You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,32..
An Investment of $83 generates after-tax cash flows of $46 in year one, $70.00 in year 2, and 135.00 in year 3. The required rate of return is 20 percent. The net value is what?
What is the expected value of the investment in U.S. dollars? b) What is operational exposure? Discuss the factors that may influence the size of a company's operating exposure?
The bank estimates its economic capital on product 1 to be $25 million and for product 2 to be $90 million. The bank's target hurdle rate is 20 percent. Which product would you recommend the bank invest in and why?
York is taking out a $10,000,000 two-year loan at a variable rate of LIBOR plus 1.50%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 1.00%. What is the all-in-c..
Flying Bat Corporation is currently planning to start production of boat navigation systems. The firms selling price per unit is $410.58. Variable costs per unit $258.41. Interest expense is running at $50,000 per year, while fixed costs total $422,7..
The risk per unit of return is measured by the
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