Using the homemade leverage strategy

Assignment Help Financial Management

Reference no: EM131571925

Question 1

You currently own 250 shares of Blue Jet Inc. Blue Jet is an all equity firm that has 36,000 shares of stock outstanding at a market price of $25 a share. The company earnings before interest and taxes are $48,000. Blue Jet Inc., has decided to issue $200,000 of debt at a 9 percent rate of interest. This debt will be used to repurchase shares of stock.

i. How many shares of Blue Jet Inc. stock must you sell to unlever your position if you can loan out funds at a 9 percent interest rate?

ii. Using the homemade leverage strategy, show that you can earn the same returns on your stock if the company decided to lever its position.

Question 2

Bruce & Co. expects its EBIT to be $85,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. If the tax rate is 35 percent,

i) What is the value of the firm?

ii) What will the value be if Bruce borrows $60,000 and uses the proceeds to repurchase shares?

Reference no: EM131571925

Questions Cloud

What is the most you should be willing to pay : What is the most you should be willing to pay for a share of Techstart?

What was lower case cash flow from operations : What was Lower Case's cash flow from operations for 2008?

Calculate the payback period for the purchase of the truck : Calculate the payback period (PBP) for the purchase of the truck. Using the net present value method, determine if Broome Ltd. should purchase the truck.

Least three each from traditional risk and erm : Identify and address at minimum ten risks, with at least three each from traditional risk and ERM.

Using the homemade leverage strategy : Using the homemade leverage strategy, show that you can earn the same returns on your stock if the company decided to lever its position.

What would the annual yield to maturity : What would the annual yield to maturity be on the bond if you purchased the bond today?

Does the company have enough capitalization : Prepare a cash flow budget. Does the company have enough capitalization? Which month does the company achieve positive cash flow?

Discuss ways of the current telephone numbering plan : Discuss ways in which the current telephone numbering plan can be extended to accommodate the rapid demand for more telephone numbers.

What are its next three dividends : Bearcat Corp. paid a dividend of $1.50 this year. What are its next three dividends if it is expected to grow at 3%?

User Account

All Pages