What is the chance of having unfavorable financial leverage

Assignment Help Financial Management
Reference no: EM13927326

National Value Foods Company (NVFC) is considering opening a new wholly owned subsidiary in Booneville. To finance this investment, NVFC is considering two financing plans: (1) sell 600,000 shares of common stock at $20 each or (2) sell 200,000 shares of common stock at $20 each and $8 million of 10 percent long-term debt.

a. If NVFC has a marginal tax rate of 40 percent, what is the EBIT-EPS indifference point for this investment?

b. NVFC's expected level of EBIT from this division is $1.0 million with a standard deviation of $400,000. If the firm uses the second financing plan, what is the chance of having unfavorable financial leverage?

Reference no: EM13927326

Questions Cloud

What is the probability of negative earnings per share : The current price per share of common stock is $50. If this repurchase is undertaken, what is the probability of negative earnings per share during the coming year?
Laplace transform for an expression : Last week was a basic introduction to Matlab. This week you will learn how to use three built-in functions (laplace, ilaplace and dsolve).Using the syms function
Discuss the concept of ecological services : In a 2-3 page paper, using APA-style formatting, define and discuss the concept of ecological services. Then, review the "Ecological Services of Rivers" outlined in Mini Lecture:
International market selection and market entry : Finding current and accurate information about overseas markets can be difficult and time consuming. What sources would you use if you were a manager researching international market opportunities? Would you rely on newspaper reports? Or personall..
What is the chance of having unfavorable financial leverage : NVFC's expected level of EBIT from this division is $1.0 million with a standard deviation of $400,000. If the firm uses the second financing plan, what is the chance of having unfavorable financial leverage?
What hides the systems hardware : What hides the system's hardware underneath an abstract, high-level programming interface?
Correlation between coffee and cholesterol : A study from a Colombian research center is about to publish a pilot study regarding a new coffee plant that they believe can reduce total cholesterol in humans. They gave increasing doses (cups of coffee) to a test patient over several weeks and ..
Problem regarding the example of an organization : 1. Which of the following is an example of an organization? Question 2. In Florida, a vacationer could choose from over 200 timeshare resorts. In Vermont, the choice is limited to 15. A resort in Vermont has
Write this letter to jane and then run it by me : Please write this letter to Jane and then run it by me. You're doing a fantastic job so far. But, as you know there have been more developments in the Johnson case that require your heroic efforts. We had a conference with the district court judge ..

Reviews

Write a Review

Financial Management Questions & Answers

  Insurance company are entirely non-systematic

An insurance company’s losses of a particular type per year are to a reasonable approximation normally distributed with a mean of $150 million and a standard deviation of $50 million. (Assume that the risks taken on by the insurance company are entir..

  After tax cost of capital to walgreen for the bonds

The Walgreen Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new $1000 par value bonds with a 15 year maturity at a price of $953 that carries a coupon interest rate of 12.6 percent that ..

  What risks do banks face in the check clearing process

In many cases, banks do not permit depositors to spend the proceeds of a deposit until several days have elapsed. What risks do banks face in the check clearing process? Does this justify holds on checks?

  Valuation with price and earnings multiples

Valuation with price/earnings multiples For each of the firms shown in the following table, use the data given to estimate its common stock value employing price/ earnings (P/E) multiples.

  Court issued a protective order against the request

Rita Peatie filed a suit in a Connecticut state court against WalMart Stores, Inc., to recover for injuries to her head, neck, and shoulder. Peatie claimed that she had been struck two years earlier by a metal cylinder falling from a store ceiling. T..

  Describe ?carefully what happens if the investor exercises

Explain ?carefully what happens if the investor exercises the option after two months. ?Suppose that the futures price at the time of exercise is 362 and the most recent ?settlement price is 360.

  Legally liable for the tax underpayment

Lebron received $50,000 of compensation from his employer and he received $400 of interest from a municipal bond. What is the amount of Lebron's gross income from these items? Lydia and John Wickham filed jointly in year 1. They divorced in year 2. I..

  Dividend is expected to grow

Mitts Cosmetics Co.'s stock price is $50.30, and it recently paid a $2.25 dividend. This dividend is expected to grow by 25% for the next 3 years, then grow forever at a constant rate, g; and rs = 13%. At what constant rate is the stock expected to g..

  What is her cash flow under the current capital structure

Star, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 30 percent debt. Currently there are 5,000 shares outstanding and the price per share is $86. Ms. Brown, a sharehold..

  Appropriate expected rates of return for three securities

The expected return for the general market is 13.0 percent 9.2, and the risk in the market is 9.2 percent. Tasaco, LBM, and Exxos have betas of 0.838, 0.652 and 0.572 respectively. What are the appropriate expected rates of return for the three secur..

  Use the equivalent annual annuity method

The company is choosing between machine A and B (they are mutually exclusive and the company can only pick one). The initial cost of machine A is $400,000 and it will last for 7 years before it needs to be replaced. Which machine is a better choice f..

  Invest in a portfolio containing stock

You have $130,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 14 percent and that has only 77 percent of the risk of..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd