Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:anvas
Consider a firm has $20 million of assets, all financed by equity. 100% equity financed, or unlevered.
Suppose that there are one million outstanding shares of the firm, valued at $20 per share. If the firm's
management identify investment opportunity requiring $10 million of new funds.
The firm can raise the funds in one of the following three ways:
1. Issue $10 million equity
2. Issue $5 million equity and borrow $5 million
3. Borrow $10 million
4. Complete the following table for each financing package after the financing capital structure is
completed
Debt-
Financing Asset in
Equity
Debt-to
to-
Debt in
in
million
No. of
package Million
Shares
equity
asset
million
ratio
ratio
Package
1
Package
Package
3.
b. Suppose the Matrix Corporation has $4.5 million of operating earnings. Show that the firm's return on assets is 15%
Transcribed Image Text:Canvas
C. compute the earnings per share for the three financing packages by completing the table below:
Financial Package
3
Operating earnings in million
- interest expense in million
- Earnings available in million
No. of Shares
Earnings per share
d. complete the table below for each of the three financing packages based on three assumptions for the return on assets
shown below;
Financial Packages
Annual (ROA)
1 least leverage
3 most leverage
15%
10%
5%
F1
DII
F2
F3
F4
prt sc
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