Concept explainers
a)
To calculate: The EPS (Earnings per share) under three scenarios before the debt issue and the changes in EPS while the economy expands a recession.
Introduction:
The EPS is the part of the profit of a firm that is allocated to every outstanding share of the common stock. It indicates the profitability of the company.
Answer:
The EPS under the recession, normal, and expansion periods are $2.48, $3.82, and $4.77 respectively and the percentage of change in EPS is -35% and +25 for the recession and expansion periods respectively.
b)
To calculate: The EPS (Earnings per share) under three scenarios before the debt issue and the changes in EPS while the economy expands a recession by assuming that the firm undergoes the planned recapitalization.
Introduction:
The EPS is the part of the profit of a firm that is allocated to every outstanding share of the common stock. It indicates the profitability of the company.
Answer:
After recapitalization, the EPS under the recession, normal, and expansion periods are $2.70, $4.80, and $6.30 respectively and the percentage of change in EPS is -43.75% and +31.25 for the recession and expansion periods respectively.
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FUND. OF CORPORATE FIN. 18MNTH ACCESS
- p5 In a world with taxes, the value of a leveraged firm equals the value of an unleveraged firm plus: the present value of its debt. the present value of the interest tax shield. the present value of its future cash flows. none of the above.arrow_forwardNielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of Nielson's assets is $400 million. 1) The expected return for Nielson Motors stock without leverage is closest to: A) -25.0%. B) -17.5%. C) -12.5%. D) 12.5%.arrow_forwardH3. The value of HILEV firm at the end of one year can be $50 m or $100 m with equal probability of 0.5. The firm has debt with a face value of $50 m that matures in one year. Assume that investors are risk-neutral and the risk free rate is zero. The CEO of the firm decides to substitute assets of the firm with more risky assets immediately, so that the value of the firm at the end of one year is either $30 m or $120 m with equal probability of 0.5. This asset substitution will lead to A. A gain of $10 million for stockholders and a loss of $10 million for bondholders B. A loss of $10 million for stockholders and a gain of $10 million for bondholders C. No gain or loss to debtholders or equity holders D. Both debtholders and equity holders will lose $10 million from the increased risk of the business Show proper step by step calculationarrow_forward
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