Skip to main content

As requested, I include full question. only need answer part d) https://www.bartleby.com/questions-and-answers/q1.-consider-an-allequity-firm-that-is-contemplating-going-into-debt.-the-market-value-of-equity-is-/c24b4703-bc9d-4a3a-8d7f-8964bef82326 Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return. Current ProposedAssets $10,000 $18,000Debt $0 $8,000Equity $10,000 $10,000Debt/Equity ratio 0.00 1.00Interest rate n/a 7%Shares outstanding 500 500Share price $20 $20 (a) If the required rate of return on unlevered equity is 10%, fill out the following table for the company before the debt is issued: Recession Expected ExpansionEBIT $500 $1,000 $1,500Interest 0 0 0Net incomeEPSROAROE (b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued. (c) If an investor is not happy with the debt the company added, show the steps the investor can take to do homemade “un-leverage” and earn the same ROA and ROE as in part (a). Set up a table to show that the unleveraged works.(d) If there are no taxes, calculate the WACC before and after the debt is added (assume the 7% payment on the debt = YTM). (e ) If the company stock price goes up by 2% from announcing it is adding debt to expand the business, what effect does this have on the WACC?

Question

As requested, I include full question. only need answer part d)

https://www.bartleby.com/questions-and-answers/q1.-consider-an-allequity-firm-that-is-contemplating-going-into-debt.-the-market-value-of-equity-is-/c24b4703-bc9d-4a3a-8d7f-8964bef82326

Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return.

Current Proposed
Assets $10,000 $18,000
Debt $0 $8,000
Equity $10,000 $10,000
Debt/Equity ratio 0.00 1.00
Interest rate n/a 7%
Shares outstanding 500 500
Share price $20 $20

(a) If the required rate of return on unlevered equity is 10%, fill out the following table for the company before the debt is issued:

Recession Expected Expansion
EBIT $500 $1,000 $1,500
Interest 0 0 0
Net income
EPS
ROA
ROE

(b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued.

(c) If an investor is not happy with the debt the company added, show the steps the investor can take to do homemade “un-leverage” and earn the same ROA and ROE as in part (a). Set up a table to show that the unleveraged works.
(d) If there are no taxes, calculate the WACC before and after the debt is added (assume the 7% payment on the debt = YTM).

(e ) If the company stock price goes up by 2% from announcing it is adding debt to expand the business, what effect does this have on the WACC?

Expert Solution

Want to see the full answer?

Check out a sample Q&A here
Blurred answer
Students who’ve seen this question also like:
Entrepreneurial Finance
Entrepreneurial Finance
6th Edition
ISBN: 9781337635653
Author: Leach
Publisher: Cengage
Not helpful? See similar books
Entrepreneurial Finance
Entrepreneurial Finance
Evaluating Operating And Financial Performance. 1cM
Similar questions
To this solution
marketing sidebar icon
Want to see this answer and more?
Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*
*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.

Related Finance Q&A

Find answers to questions asked by students like you.

Q: Each answer choice illustrates the relationship among Debt/Equity, rs, rd(1-T), and WACC for a…

A: Weighted Average Cost of Capital(WACC) is average cost of financing the given capital structure of…

Q: Which of the following can be categorized as Short term sources of finance ?i Equity Sharesii Trade…

A: Short term sources are finances are those sources of finance for the business which is available for…

Q: Which of the following can be categorized as Short term sources of finance ?i Equity Sharesii Trade…

A: Short-term investments are financial instruments that can be easily converted into cash. The…

Q: Determine if the following, if stocks or bonds 1. Its buyers receive return called dividend. a.…

A: Note: As per our guidelines, only the first three subparts will be answered    1. A dividend is a…

Q: a. What is the market debt-to-value ratio of the firm? b. What is University's WACC? (For all the…

A: Market value is calculated by present value of cash flows from the debt issued at given yield to…

Q: Hi, is it true that "shareholders capital (total common equity)" is consider as TOTAL EQUITY=…

A: Shareholder equity means the amount that belong to the owner of the company i.e. share holder. All…

Q: 14-which of the following statements about the characteristics of debt and equity are true? Please…

A: Debt is an amount borrowed from an investor which has a fixed obligation of income, and Equity is an…

Q: Which of the following can be categorized as Long term sources of finance ? i Equity Shares ii Trade…

A: Equity shares: Equity shares are a Long-term financing source of a company. Equity shares represent…

Q: Match the words with the term.   Question 6 options: 12345 financial need 12345…

A: Working Capital Working capital is refer as the capital of the business which are used in day to day…

Q: Which of the following can be categorized as Short term sources of finance? i Equity Shares ii.…

A: Source of finance can be both short term and long term

Q: Which is correct about debt securities? a. Debt securities make the holders owners and give them the…

A: a and c are not correct because debt securities holders are NOT the owners. They are lenders to the…

Q: Use the following information for the next two questions. PINA CO. carries the following marketable…

A: All financial instruments held for sale are recognized at FVOCI and the instruments held for trading…

Q: 5 Given the following data for the King Company: How would common stock appear on a common size…

A: Income statement: The income statement is one of the three primary financial statements used to…

Q: Directions: In the space provided each item, you identify which of the following statement best…

A: Stocks refer to the proportional ownership of an investor into a company. Through this ownership,…

Q: Which of the following statements correctly describes aspects of simple interest as discussed in…

A: Simple interest is one of the methods used for charging interest on a loan by multiplying the…

Q: Based on the presumption in IAS 27, the cost method is applied for equity securities when the…

A: Based on the presumption in IAS 27, the cost method is applied for equity securities when the…

Q: 16- Which of the following statements is/are correct? i. The sale of stocks is also referred to as…

A: Debt and equity financing are two very different ways of financing your business.

Q: Which of the following statements correctly describes the nature of direct financing as discussed in…

A: Direct financing is where funds are raised from investor through issue of fresh equity shares…

Q: Mark buys a financial asset from the DBA. This financial asset is an instrument of short term…

A: Mark buys a financial asset from the DBA. This financial asset is an instrument of short term…

Q: Which one of the following is referred as Equity finance? O a. Sale of money market instruments O b.…

A: Equity refers to the amount which is being invested or owned by shareholders means the owner of the…

Q: h of the following statements correctly describes the nature of indirect financing as discussed in…

A: Indirect source of financing which is not done directly between two parties but direct financing…

Q: EQUITY ACCOUNTS AND PAID-IN-CAPITAL Are there any other equity accounts than those listed below?…

A: Stockholders’ equity:The claims of owners on a company’s resources, after the liabilities are paid…

Q: 10. This refers to the process where the issuer directly sold the bonds only to qualified investors…

A: Issuer :- An issuer is one who issue financial secutities to the public, Goverment, banks, NBFC etc.…

Q: Which of the following is not a money market instrument? a. Equity Shares b. Treasury Bills c.…

A: Money market instrument means those instrument which are issued in money market and generally for…

Q: ou are asked to identify how each of these items is shown in the financial statements. (a) gain…

A: Financial Statements are prepared by the management for reporting purposes. These are the essential…

Q: Tell whether the following statements describe the characteristics of stocks or bonds. e. Issues of…

A: Stocks are the shares held by owners of the companies. They represent part ownership in the…

Q: Answer the following questions in a separate document. Explain how you reached the answer or show…

A: a).                                                            = 8 x 0..65…

Q: . What is the cost of each of the capital components? Do not round intermediate calculations. Round…

A: Cost of each form of capital is computed in different manner and it should be noted that cost of…

Q: Equity Accounts Are there any other equity accounts than those listed below?  Additionally what is…

A: Equity accounts show the amount due to the owners of the business.  Equity accounts comprise of…

Q: The FASB Accounting Standards Codification represents the single source of authoritative U.S.…

A: Click to see the answer

Q: Eaton Electronic Company's treasurer uses both the capital asset of common equity (also referred to…

A: Answer:   Ki = 0.118 or 11.8%

Q: 7.) Describe the debt and equity markets? How do organizations obtain financing from each market?…

A: Debt is considered riskless, however equity securities have some inherent risk.

Q: Definition of Different Equity Accounts Would you please tell me what type of business the following…

A: Click to see the answer

Q: The following data pertains to Kyne Co.’s investments in marketable equity securities:…

A: Unrealised Gain:   An unrealised gain is a potential profit that can arise from an investment. It is…

Q: LL R You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity,…

A: Debt Ratio is calculated as total debt divided by the total assets. Equity multiplier is calculated…

Q: u are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.),…

A: In finance, leverage for any form is measured with the value of debt and debt to equity ratios where…

Q: dividends and claims in a firm Statement 2: Equity securities are loansmade by the is suing firm…

A: Step 1 As their multiple questions are given, we do only first question.

Q: Indicate whether each of the following relates to equity (E) or debt (D) financing and whether…

A: Equity financing: Equity financing is the larger amount of long-term financing that can be raised…

Q: 6- Unikai company LLC have some surplus funds for a short period of time which they want to invest…

A: Solution Best short-term investment for a company. (1) Recurring Deposit (2) Money market account…

Q: For private firm, Altman adjusts the public model by changing the numerator for the variable X4 from…

A: Analysis of financial models refers to the determination of the strength and implications due to…

Q: Explain how continuous reliance on debt financing will affect the return to the equity holders or…

A: Financing is the method through which a corporation acquires capital or funds from the financial…

Q: Explain how continuous reliance on debt financing will affect the return to the equity holders or…

A: M&M's approach suggests that the valuation of the firm is not important to the capital structure…

Q: If a provision is made for an impairment of 4,000 TL in stocks, which account should be credited?…

A: Journal entry is a primary entry that records the financial transactions initially.

Q: Which of the following is False in regards to Share premium account? a. It will be collected when…

A: Share premium account -   Share premium represents that, the amount of premium received in excess of…

Q: If an investor were to sell 100 shares of MicroSoft stock to another investor in the securities…

A: A financial market is a marketplace that facilitates the trading of financial securities, i.e., the…

Q: Mr. Ahmed would like to buy securities. Which of the following securities should he not to buy to…

A: A business entity needs funds to finance its non-current assets and day-to-day business operations.…

Q: The stockholders’ equity section of the balance sheet includes which of the following accounts?…

A: Stockholder's equity is recorded on organization's balance sheet and its amount is the difference…

Q: Which of the following way to classify and measure financial instruments do you favor?  Justify your…

A: Option 1).  IFRS 9: See page 7 of IFRS 9-Project-Summary.pdf.  Then click OK.

Q: Discuss the implications of financing through debt as they compare to financing through equity. What…

A: When a company raises capital by selling debt instruments to investors, this is referred to as debt…

Q: A)  Provide a real-life example of a long-term external source of finance (debt or equity issue)…

A: have explained 2-3 companies of US in the next sheet when it comes to the deployment of long term…

Knowledge Booster
Finance
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • Which of the following can be categorized as Short term sources of finance ?i Equity Sharesii Trade Creditiii Debentureiv Money Market Instruments a.Only Equity Shares b.Both Equity Shares and Debentures c.Only Money Market Instruments d.Both Money Market Instruments and Trade Credit
    The following information is also available: 1. Current assets include cash P3,800, accounts receivables P18,500, note receivables (maturity date is on July 1,2023) P10,000 and land P12,000. 2. Long term investments include a P4,600 investment in fair value though other comprehensive income securitiesthat is expected to be sold in 2022 and a P9,000 investment in AllDay company bonds that are expected to be helduntil their December 31, 2029 maturity date. 3. Property and equipment include buildings costing P63,400, inventories costing P30,500 and equipment costingP29,600. 4. Intangible assets include patents that cost P8,200 and on which P2,300 amortization have accumulated, andtreasury shares that costs P1,800. 5. Other assets include prepaid insurance (which expires on November 30, 2022) P2,900, sinking fund for bondretirement P7,000 and trademarks that cost P5,200 and on which P1,500 amortization has accumulated. 6. Current liabilities include accounts payable P19,400, bonds payable…
    The following information is also available: 1. Current assets include cash P3,800, accounts receivables P18,500, note receivables (maturity date is on July 1,2023) P10,000 and land P12,000. 2. Long term investments include a P4,600 investment in fair value though other comprehensive income securitiesthat is expected to be sold in 2022 and a P9,000 investment in AllDay company bonds that are expected to be helduntil their December 31, 2029 maturity date. 3. Property and equipment include buildings costing P63,400, inventories costing P30,500 and equipment costingP29,600. 4. Intangible assets include patents that cost P8,200 and on which P2,300 amortization have accumulated, andtreasury shares that costs P1,800. 5. Other assets include prepaid insurance (which expires on November 30, 2022) P2,900, sinking fund for bondretirement P7,000 and trademarks that cost P5,200 and on which P1,500 amortization has accumulated. 6. Current liabilities include accounts payable P19,400, bonds payable…
  • I need help with a question please: complete it before 3.00 pm Some Chief Financial Officers were asked if their companies had a target debt-equity ratio. Most of them answered that they did have some form of a target debt-equity ratio.   What does this say about the trade-off theory of capital structure?   Does it contradict the trade-off theory, or does it not test the trade-off theory, or is it in line with the predictions of the trade-off theory?
    Hi, is it true that "shareholders capital (total common equity)" is consider as TOTAL EQUITY= RM7168905 based on the financial statement in the picture? Is it correct or am I wrong?
    The following information is also available: 1. Current assets include cash P3,800, accounts receivables P18,500, note receivables (maturity date is on July 1, 2023) P10,000 and land P12,000. 2. Long term investments include a P4,600 investment in fair value though other comprehensive income securities that is expected to be sold in 2022 and a P9,000 investment in AllDay company bonds that are expected to be held until their December 31, 2029 maturity date. 3. Property and equipment include buildings costing P63,400, inventories costing P30,500 and equipment costing P29,600. 4. Intangible assets include patents that cost P8,200 and on which P2,300 amortization have accumulated, and treasury shares that costs P1,800. 5. Other assets include prepaid insurance (which expires on November 30, 2022) P2,900, sinking fund for bond retirement P7,000 and trademarks that cost P5,200 and on which P1,500 amortization has accumulated. 6. Current liabilities include accounts payable P19,400, bonds…
    • SEE MORE QUESTIONS
    Recommended textbooks for you
  • Entrepreneurial Finance
    Finance
    ISBN:9781337635653
    Author:Leach
    Publisher:Cengage
  • Entrepreneurial Finance
    Finance
    ISBN:9781337635653
    Author:Leach
    Publisher:Cengage