ProposedCurrent$6,000,000 $6,000,000$500,000$5,500,000 $5,000,000AssetsDebt$1,000,000EquityDebt/EquityRatioShare Price,Shares0.090.20$15$15366,667333,333OutstandingInterest rate10.8333%10.8333%EBITInterestNet IncomeROEEPS$1,000,000 $1,000,000$54,167$945,83317.20%$2.58$108,333$891,66717.83%$2.68Your firm is considering moving from the current capital structure to theproposed capital structure, replacing $500,000 in equity by increasing debt by$500,000, because with EBIT of $1,000,000 the EPS is greater ($2.68, instead of$2.58).a) What is the breakeven EBIT between the current and proposed capital structures?b) What is the EPS at the breakeven EBIT (rounded to two decimal places)?) With EBIT above the breakeven amount, which of the capital structures would bepreferred?

To operate the business, the company requires funds which are arranged through external sources.…

Answered: Proposed Current $6,000,000 $6,000,000…

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

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Q 04: Required: Calculate the value of Firm and WACC for the following capital structures EBIT of Firm. 250,000 Ke = 11% Kd = 7% Debt capital Rs. 500,000 Debt = Rs. 700,000 Debt =Rs. 200,000 Particulars Case 1 Case 2 Case 3 EBIT 250,000 250,000 250,000 (-) Interest 30,000 42,000 12,000 EBT 220,000 208,000 238,000 Ke 10% 10% 10% Value of Equity 22,00,000 208,0000 2380,000 (EBT / Ke) Value of Debt 500,000 700,000 200,000 Total Value of Firm 2,700,000 2,780,000 2,580,000 WACC (EBIT / Value) * 100
Equity = 6,300,000 Debt = 3,920,000 Preferred stock = 6,000,000 Cost of eqiuty = 10.91% cost of debt 8.29% Cost of preffered stock = 7.5% 1. If The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Should this loan portion be included to calculate the weighted average cost of capital (WACC) for the company? give reasons for your answer. 2. Calculate the WACC for the company.
Why do you deduct or subtract 1 to flotation cost? Example: Given; Annual dividend (D) = $4.75 Flotation cost (F) = 0.05 or 5% Number of shares issued (N) = 10,000 Stock price (P0) = $50 Formula; Total value able to receive = N * P0 * (1 - F) Total value able to receive = 10,000 * $50 * (1 - 0.05) Total value able to receive = $500,000 * 0.95 Total value able to receive = $475,000
47. A cooperative has a net surplus of P10M for the fiscal year 2018. How much should be given to the members in the form of dividends or interest on their share capital? Group of answer choices At least P1,000,000 At least P2,000,000 At least P2,500,000 At least P5,000,000
Problem #1KKM Corporation discussed three different plans to finance $4,000,000 toward construction of a newwarehouse. Under each of the following plans the securities will be issued at their par or face valueamount, and the income tax rate is estimated at 25% of income.Plan#1 Plan#2 Plan#3Preferred 10% stock $40 Par 2,000,000Common stock $10 Par 4,000,000 2,000,000 1,000,00010% Bonds 3,000,000Total 4,000,000 4,000,000 4,000,000 Instructions:1. Determine for each plan the earnings per share of common stock, assuming that the income beforebond interest and income tax is $800,000.2. Determine for each plan the earnings per share of common stock, assuming that the income beforebond interest and income tax is $450,000.3. Discuss the advantages and disadvantages of each plan.
A5 6c DEF Company is comparing three different capital structures. Plan A is an all-equity plan and would result in 1000 shares of stock. Plan B would result in 700 shares of stock and $13,500 in debt. Plan C would result in 800 shares of stock and $9000 in debt. The firm’s EBIT will be $10,000 per year until infinity. The interest rate on the debt is 12%. c. Compute the break-even EBIT that will cause the EPS on Plan C to be equal to the all-equity EPS (Plan A).
Assume the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 million; rD = 6%; rE = 12%; and TC = 30%. Calculate the after-tax weighted average cost of capital (WACC): Multiple Choice A) 10.5% B) 10.05% C) 15% D) 9.45%
A5 6a DEF Company is comparing three different capital structures. Plan A is an all-equity plan and would result in 1000 shares of stock. Plan B would result in 700 shares of stock and $13,500 in debt. Plan C would result in 800 shares of stock and $9000 in debt. The firm’s EBIT will be $10,000 per year until infinity. The interest rate on the debt is 12%. a. Ignoring taxes, compute the EPS for each of the three plans. Which of the three plans has the highest EPS? Which has the lowest?
Year 0 1 Revenue 600.00 Fixed costs 100.00 Variable costs 200.00 Additional investment in NWC 10.00 Additional investment in operating long-term assets 70.00 Depreciation 60.00 Interest expenses 35.00 Newly issued debt 25.00 Principle repayments 15.00 Tax rate 0.40 Market value of the firm: Price per share No. of shares Market value Short-term debt 100.00 Long-term debt 600.00 Preferred stock 10.00 10 100.00 Common stock, equity 18.00 100 1,800.00 Total 2,600.00 Cost of equity (Rs) 0.1500 Growth rate per year from year 1 through year 5 0.10 Growth rate after year 5 0.07 What is the price per share according to the equity free cash flow model? Select one: a. $18.29 b. $10.98 c. $15.51 d. $20.87 e. $12.33
Stock price: $81 number of shares: 20000 total assets: 6,400,000 total liabilities: 4,000,000 net income: 760,000 cost of investment: $600,000 & will be financed with a new equity issue the ROI = current ROE FIND THE NPV
Q14 An entity issued 1 500 debentures with face value of R20 000 each. The coupon rate on the debentures is 12% paid annually in arrears. In order to speed the sale of the debentures, the directors decided to issue them at 10% discount. What amount would be recorded by the entity in its statement of financial position under non-current liabilities? Select one: a. R20 000 b. R15 000 000 c. R30 000 000 d. R27 000 000
Q18 If the company’s EBIT is OMR 500,000; market value of the equity is OMR 2,000,000 and value of Debt is OMR 4,000,000; then what is the overall cost of capital of the firm under Net Income Approach? a. 12.5% b. 10% c. 25% d. 8.33%

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