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Your company doesn't face any taxes and has $762 million in assets, currently financed entirely with equity. Equity is worth $51.20 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:
State Recession Average Boom
Probability of State .15 .65 .20
Expect EBIT in State $112 million $187 million $247 million
The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure? (Round your intermediate calculations and final answer to 2 decimal places except calculation of number of shares which should be rounded to nearest whole number.)
Determining Portfolio Weights.
In a perfectly efficient market, an active strategy mutual fund that charges a 1% fee has about a 47% chance of beating the index net of fee. In a universe of 5,000 funds, how many funds would you expect to beat the index all but once out of the past..
the bank decides to use its internal model for measurement of market risk.
Erika and Kitty, who are twins, just received $35,000 each for their 25th birthdays. They both have aspirations to become millionaires. Each plans to make a $5,000 annual contribution to her "early retirement fund" on her birthday, beginning a year f..
One drawback of switching from a partnership to the corporate form of organization is the following:
Assume large-company stocks returned 12.8 percent on average over the past 75 years. The risk premium on these stocks was 7.9 percent and the inflation rate was 3.6 percent. What was the average nominal risk-free rate of return for those 75 years?
You are given the following information for Gandolfino Pizza Co.: sales = $51,000; costs = $22,700; addition to retained earnings = $7,600; dividends paid = $2,800; interest expense = $5,100; tax rate = 35 percent. Calculate the depreciation expense.
Great Corporation has the following capital situation. Debt: One thousand bonds were issued five years ago at a coupon rate of 8%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 36% Preferred stock: D..
An investor opens her first brokerage account, and purchases 500 shares of Cisco shares at $24 per share. She borrows $5,000 from her broker to help pay for the purchase. The interest rate of the loan is 3.5%. What is the initial margin in her accoun..
You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $110 initially, and then $155 per year in maintenance costs. Machine B costs $180 initially, has a life of three years,..
Given an interest rate of 6.0 percent per year, what is the value at Year 8 of a perpetual stream of $3,050 payments that begin at Year 19?
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $240,000, has a four-year life, and requires $75,000 in pretax annual operating costs. System B costs $340,000, has a six-year life..
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