Finance Questions

Q.2                 

            The Dybvig Corporation’s common stock has a beta of 1.2. If the risk-free rate is 5.2 percent and the expected return on the market is 10 percent, what is Dybvig’s cost of equity capital? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))          

                       

              Cost of equity capital          %  

                       

Q.3      Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has a coupon rate of 8 percent annually.        

                       

            What is Advance’s pretax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))           

                       

              Cost of debt%  

                       

            If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))          

                       

              Cost of debt%  

                       

                       

Q6.      Problem 13-5 Calculating WACC   

                       

            Mullineaux Corporation has a target capital structure of 80 percent common stock and 20 percent debt. Its cost of equity is 17 percent, and the cost of debt is 11 percent. The relevant tax rate is 35 percent.           

                       

            What is Mullineaux’s WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))        

                       

                       

Q8       Miller Manufacturing has a target debt–equity ratio of 0.60. Its cost of equity is 15 percent, and its cost of debt is 4 percent. If the tax rate is 35 percent, what is Miller’s WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))           

                       

              WACC           %  

                       

                       

Q9       Och, Inc., is considering a project that will result in initial aftertax cash savings of $1.72 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt–equity ratio of .8, a cost of equity of 11.2 percent, and an aftertax cost of debt of 4.0 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm undertakes; management uses the subjective approach and applies an adjustment factor of +1 per cent to the cost of capital for such risky projects.   

                       

            What is the maximum initial cost of company would be willing to pay for the project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

                       

              Maximum cost         $

                       

                       

                       

Q13     Money, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 25 percent lower. Money is considering a $140,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 12,000 shares outstanding. Money has a tax rate 35 percent.         

                       

            Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) 

                       

                        EPS

              Recession     $

                       

              Normal         $

                       

              Expansion    $

                       

                       

                       

                       

            Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)           

                       

            Percentage changes in EPS 

              Recession     %  

              Expansion    %  

                       

                       

                       

            Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

                       

                        EPS

              Recession     $

                       

              Normal         $

                       

              Expansion    $

                       

                       

                       

                       

            Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))           

                       

            Percentage changes in EPS 

              Recession     %  

              Expansion    %  

                       

                       

Q15     Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 150,000 shares of stock outstanding. Under Plan II, there would be 100,000 shares of stock outstanding and $1.20 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes.

                       

            If EBIT is $300,000, what is the EPS for each plan? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) 

                       

                        EPS

              Plan I            $

                       

              Plan II           $

                       

                       

                       

                       

            If EBIT is $550,000, what is the EPS for each plan? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) 

                       

                        EPS

              Plan I            $

                       

              Plan II           $

                       

                       

                       

                       

            What is the break-even EBIT? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations.) 

                       

              Break-even EBIT     $

                       

                       

                       

Q20     Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all equity firm, has 17,000 shares of stock outstanding, currently worth $25 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is $67,000, and its cost of debt is 7 percent. Each firm is expected to have earnings before interest of $77,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 7 percent per year.       

                       

            What is the value of Alpha Corporation? (Do not round intermediate calculations.)  

                       

              Value of Alpha         $

                       

                       

            What is the value of Beta Corporation? (Do not round intermediate calculations.)    

                       

              Value of Beta           $

                       

                       

            What is the market value of Beta Corporation’s equity? (Do not round intermediate calculations.)

                       

              Market value of Beta’s equity        $

                       

                       

            How much will it cost to purchase 20 percent of each firm’s equity? (Do not round intermediate calculations.)   

                       

                        Amount to invest

              Alpha            $

                       

              Beta  $

                       

                       

                       

                       

            Assuming each firm meets its earnings estimates, what will be the dollar return to each position in part (d) over the next year? (Do not round intermediate calculations.)  

                       

                        Dollar return on investment

              Alpha            $

                       

              Beta  $

                       

                       

                       

            The Maxwell Company is financed entirely with equity. The company is considering a loan of $1.81 million. The loan will be repaid in equal installments over the next two years, and it has an interest rate of 9 percent. The company’s tax rate is 40 percent.       

                       

            According to MM Proposition I with taxes, what would be the increase in the value of the company after the loan? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))          

                       

              Increase in the value          $

                       

                        

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