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Two inventive 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. 5 million dollars would be raised by selling 160,000 shares of common stock.. Plan B would involve the use of long-term debt financing. 3 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. Witth 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: 1) find the EBIT indiffernece level associated with the two financing proposals 2) Prepare income statements for the two plans that prove EPS will be the same regardless of the plan chosen at the EBIT level found in part 1)
Finance balance sheet: KneeMan Markup Company has total debt obligations with book and market values equal to $30 million and $28 million, respectively. It also has total equity with book and market values equal to $20 million and $70 million, respec..
A firm has operating profits of $15,000 on unit sales of 10,000 units. Fixed costs are $30,000; each unit sells for $11.50 and has variable cost of $7.00. What is the firm's break-even sales level?
Breakeven and Leverage calculations are used to adjudge the operational riskiness of a company, project or investment. The Breakeven and Leverage estimates are compared to projections to assess the forecasting risk associated with the project. What i..
Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 26 percent per year during the next three years, 16 percent over the following year, and then 8 percent per year indefinitely. The required return on this stock is 15 perce..
Bob Jenkins wishes to have $800,000 in a retirement fund 20 years from now. He can create the retirement fund by making a single lump-sum deposit today. If upon retirement in 20 years, Bob plans to invest $800,000 in a fund that earns 4%, what is the..
Assuming a tax rate on ordinary income of 25% and a long-term capital gain rate of 10%, how much would you pay in taxes if you sold stock "A" for a $200 capital gain after holding it for 5 months, stock "B" for a $300 capital gain after holding it fo..
In order to fund her retirement, Michele requires a portfolio with an expected return of 0.11 per year over the next 30 years. She has decided to invest in Stocks 1, 2, and 3, with 25 percent in Stock 1, 50 percent in Stock 2, and 25 percent in Stock..
Mr. Long runs a chain of outlet stores called Cheap Ware (CW). Currently CW uses only equity capital. Mr. Long was approached by representatives from Lenders Inc. who have pointed out to him that his cost of unlevered equity capital is 11% and the co..
Your stock portfolio consists of only two stocks. You have $115,000 in Company A and $125,000 in Company B. Company A has an actual return of -8% and Company B has a return of 12%. What is the return on your portfolio?
Consider a 15-year, $150,000 mortgage with a rate of .0590 percent. Nine years into the mortgage, rates have fallen to 5 percent. What would be the monthly saving to a homeowner from refinancing the outstanding mortgage balance at the lower rate for ..
ABC, Inc. issues a split-coupon $1,000 bond that matures in seven years. Interest payments are $80 a year (8%) and start after three years have elapsed. The bond initially sells for a discount price of $794. You are in the 30 percent income tax brack..
Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.71 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. What is the maximum initial cost the co..
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