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You have just been hired as the Chief Financial Officer (CFO) of the Ski Shop, a chain of ski equipment stores. The CEO has asked that your first project be an evaluation of the firm’s capital structure. The Ski Shop has expanded aggressively in recent years and its debt ratio has increased substantially. In fact, it now exceeds the ratios of other firms in the industry. You have determined that a change in capital structure that involves issuing $300 million of new equity and using it to retire long-term debt would put the company’s leverage in line with that of others in the industry. You have been asked to prepare an analysis of the issue and make a recommendation.
Provide answers to the following questions: a) What are the company’s current equity value, firm value, and the debt-to-equity ratio? b) Assume that after recapitalization, the equity value increases by $50 million, in addition to the $300 million new equity issue. What would be the equity value, firm value, and the debt-to-equity ratio after the recapitalization is completed?
You then estimate that the lower debt ratio would result in the firm’s debt rating to improve from B to AAA. c) What is the firm’s current (before recapitalization) WACC? d) What would the firm’s WACC be following the recapitalization? Does it make sense to do the recapitalization?
Seven years ago XYZ International issued some 31-year zero-coupon bonds that were priced with a market's required yield to maturity of 12 percent and a par value of $1,000. What did these bonds sell for when they were issued?
The contribution margin per unit is equal to the:
What is the firm's balance of current assets?
If the economic life of the machine is five years and the relevant discount rate is 10 percent, should you buy the machine?
Maple Aircraft has issued a convertible subordinated debenture at 6.00% interest due 2020. The conversion price is $64.00 and the debenture is callable at 104.00% of face value. The market price of the convertible is 89.25% of face value, and the pri..
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ABC Mutual Fund has an investment objective is to provide long-term growth of capital by investing primarily in common stocks of issuers located in the U.S. with a record of above-average long-term growth. A strategy of diversification would be most ..
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An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. If the real risk-free rate is 4.06% and in..
Coca-Cola stock has an expected ROE of 14% per year, expected earnings per share of $4, and expected dividends of $2.50 per share. Its market capitalization rate is 15% per year. what are its expected growth rate, its price and its P/E ratio? b) If t..
How do political parties shape election outcomes and the formation of governments? Discuss the similarities and differences in the role of political parties in presidential and parliamentary governments, and discuss the role of parties in plurality a..
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