Corporate Finance: The Core, Student Value Edition Plus Mylab Finance With Pearson Etext -- Access Card Package (4th Edition)
4th Edition
ISBN: 9780134426785
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 14, Problem 16P
Hartford Mining has 50 million shares that are currently trading for $4 per share and $200 million worth of debt. The debt is risk free and has an interest rate of 5%, and the expected return of Hartford stock is 11%. Suppose a mining strike causes the price of Hartford stock to fall 25% to $3 per share. The value of the risk-free debt is unchanged. Assuming there are no taxes and the risk (unlevered beta) of Hartford's assets is unchanged, what happens to Hartford's equity cost of capital?
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Titan Mining Corporation has 9 million shares of common share outstanding and 120,000 semiannual bonds outstanding, par value $1,000 each. The coupon rate on bonds is 6%. The common stock currently sells for $34 per share and has a beta of 1.20, and the bonds have 30 years to maturity and sell for 93% of par. The market risk premium is 10%, T-Bills are yielding 5%, and Titan Mining’s tax rate is 35%.
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Minion, Inc., has no debt outstanding and a total market value of $332,100. Earnings before interest and taxes, EBIT, are projected to be $48,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 29 percent lower. The company is considering a $170,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,100 shares outstanding. Ignore taxes for questions a) and b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. a-1. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)a-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be…
Fowler, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 20 percent lower. The firm is considering a debt issue of $150,000 with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 15,000 shares outstanding. The firm has a tax rate 24 percent. Assume the stock price is constant under all scenarios.
a-1.
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 answers to 2 decimal places, e.g., 32.16.)
a-2.
Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate…
Chapter 14 Solutions
Corporate Finance: The Core, Student Value Edition Plus Mylab Finance With Pearson Etext -- Access Card Package (4th Edition)
Ch. 14.1 - How does the risk and cost of capital of levered...Ch. 14.2 - Why are investors indifferent to the firms capital...Ch. 14.2 - What is a market value balance sheet?Ch. 14.2 - In a perfect capital market, how will a firms...Ch. 14.3 - How do we compute the weighted average cost of...Ch. 14.3 - With perfect capital markets, as a firm increases...Ch. 14.4 - If a change in leverage raises a firm's earnings...Ch. 14.4 - True or False: When a firm issues equity, it...Ch. 14.5 - Consider the questions facing Dan Harris, CFO of...Ch. 14.5 - Prob. 2CC
Ch. 14 - Consider a project with free cash flows in one...Ch. 14 - You are an entrepreneur starting a biotechnology...Ch. 14 - Acort Industries owns assets that will have an 80%...Ch. 14 - Wolfrum Technology (WT) has no debt. Its assets...Ch. 14 - Suppose there are no taxes. Firm ABC has no debt,...Ch. 14 - Suppose Alpha Industries and Omega Technology have...Ch. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Zetatron is an all-equity firm with 100 million...Ch. 14 - Explain what is wrong with the following argument:...Ch. 14 - Consider the entrepreneur described in Section...Ch. 14 - Hardmon Enterprises is currently an all-equity...Ch. 14 - Suppose Visa Inc. (V) has no debt and an equity...Ch. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Hartford Mining has 50 million shares that are...Ch. 14 - Mercer Corp. has 10 million shares outstanding and...Ch. 14 - In mid-2015 Qualcomm Inc. had 11 billion in debt,...Ch. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Yerba Industries is an all-equity firm whose stock...Ch. 14 - Prob. 22PCh. 14 - Prob. 23PCh. 14 - Prob. 24P
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