Questions 1Maynard Inc. has no debt outstanding and a total market value of $250,000. EBIT are projectedto be $28,000 if the economic condition is normal. If there is a strong expansion in the economy.then EBIT will be 30% higher. If there is a recession, then EBIT will be 50% lower. Maynard isconsidering a $90,000 debt issue with a 7% interest rate. The proceeds will be used torepurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for thisproblem.A. Calculate EPS under each of the 3 economic scenarios before any debt is issued. Alsocalculate the percentage changes in EPS when the economy expands or enter recession.B. Repeat part (a) assuming that the economy goes through with recapitalization. What do youobserve?C. Repeat parts a and b in ex. 1 assuming Maynard has a tax rate of 35%.

The question is based on the concept of Earning per share.

Answered: Maynard Inc. has no debt outstanding…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter21: Supply Chains And Working Capital Management

Section: Chapter Questions

Problem 13P: Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth...

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Relaxing Collection Efforts The Boyd Corporation has annual credit sales of 1.6 million. Current expenses for the collection department are 35,000, bad-debt losses are 1.5%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to 22,000 per year. The change is expected to increase bad-debt losses to 2.5% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to 1,625,000 per year. Should the firm relax collection efforts if the opportunity cost of funds is 16%, the variable cost ratio is 75%, and taxes are 40%?
WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm’s present market value capital structure, shown here, is considered to be optimal. There is no short-term debt. New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders’ required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 40%. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without issuing additional shares of equity, what is its WACC? Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC? No numbers are required to answer this question.

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