Question

Consider a firm with an EBIT of $10,600,000. The firm finances its assets with $50,200,000 debt (costing 6.6 percent) and 10,100,000 shares of stock selling at $10.00 per share. The firm is considering increasing its debt by $25,100,000, using the proceeds to buy back shares of stock. The firm is in the 40 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $10,600,000.

Calculate the change in capital structure and indicate changes in EPS.

EPS Before: 0.432

EPS After: 0.445

Answer #1

Consider a firm with an EBIT of $565,000. The firm finances its
assets with $1,150,000 debt (costing 5.9 percent) and 215,000
shares of stock selling at $14.00 per share. The firm is
considering increasing its debt by $900,000, using the proceeds to
buy back 90,000 shares of stock. The firm is in the 30 percent tax
bracket. The change in capital structure will have no effect on the
operations of the firm. Thus, EBIT will remain at $565,000.
Calculate the...

Consider a firm with an EBIT of $566,000. The firm finances its
assets with $1,160,000 debt (costing 6 percent) and 216,000 shares
of stock selling at $16.00 per share. The firm is considering
increasing its debt by $900,000, using the proceeds to buy back
91,000 shares of stock. The firm is in the 40 percent tax bracket.
The change in capital structure will have no effect on the
operations of the firm. Thus, EBIT will remain at $566,000.
Calculate the...

Consider a firm with an EBIT of $11,800,000. The firm finances
its assets with $52,600,000 debt (costing 7.3 percent) and
11,300,000 shares of stock selling at $8.00 per share. The firm is
considering increasing its debt by $26,000,000, using the proceeds
to buy back shares of stock. The firm is in the 30 percent tax
bracket. The change in capital structure will have no effect on the
operations of the firm. Thus, EBIT will remain at $11,800,000.
Calculate the EPS...

Consider a firm with an EBIT of $861,000. The firm finances its
assets with $2,610,000 debt (costing 7.5 percent) and 510,000
shares of stock selling at $5.00 per share. To reduce the firm’s
risk associated with this financial leverage, the firm is
considering reducing its debt by $1,000,000 by selling an
additional 310,000 shares of stock. The firm is in the 40 percent
tax bracket. The change in capital structure will have no effect on
the operations of the firm....

Consider a firm with an EBIT of $863,000. The firm finances its
assets with $2,630,000 debt (costing 7.7 percent) and 530,000
shares of stock selling at $8.00 per share. To reduce the firm’s
risk associated with this financial leverage, the firm is
considering reducing its debt by $1,000,000 by selling an
additional 330,000 shares of stock. The firm is in the 30 percent
tax bracket. The change in capital structure will have no effect on
the operations of the firm....

Consider an all-equity firm with 125,000 shares outstanding.
Assume that EBIT=800,000 and that EBIT will remain constant, the
firm pays out all profits (EPS = dividends per share) as dividends,
and that its tax rate is 40%. If the firm’s beta is 1.1, the
risk-free rate is 4%, and the market risk premium is 6%, what is
the firm’s stock price according to the dividend growth
model?
Now assume the firm is considering issuing $1.2m in debt at
before-tax cost...

Nielson Motors is currently an all-equity financed firm. It
expects to generate EBIT of $20 million over the next year.
Currently Nielson has 8 million shares outstanding and its stock is
trading at $20.00 per share. Nielson is considering changing its
capital structure by borrowing $50 million at an interest rate of
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capital markets. Nielson's EPS if they change their capital
structure is closest to _____ $/share.
A. 2.50
B....

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forever. The tax rate is 35%. Calculate the value of the firm.
Company U has no debt outstanding currently and the cost of equity
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tax rate is 35%.Calculate the value of the firm if it borrows $
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all of its net income as dividends and has a zero growth rate. It
has 2.5 million shares of stock outstanding. If it moves to a
capital structure that has 40 percent debt and 60 percent equity
(based on market values), its investment bankers believe its
weighted average cost of capital would be 10 percent. What would...

FCOJ, Inc., a prominent consumer products firm, is debating
whether or not to convert its all-equity capital structure to one
that is 40 percent debt. Currently, there are 5,500 shares
outstanding and the price per share is $52. EBIT is expected to
remain at $19,100 per year forever. The interest rate on new debt
is 7 percent, and there are no taxes.
a. Melanie, a shareholder of the firm, owns 270
shares of stock. What is her cash flow under...

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