Question

1. Cross Town Cookies is an all-equity firm with a total market value of $745,000. The firm has 46,000 shares of stock outstanding. Management is considering issuing $176,000 of debt at an interest rate of 6 percent and using the proceeds to repurchase shares. Before the debt issue, EBIT will be $66,800. What is the EPS if the debt is issued? Ignore taxes.

• $1.60

• $.99

• $1.73

• $1.85

• $1.36

2.

Pompeii Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt-equity ratio of 40 percent and makes interest payments of $62,000 at the end of each year. The cost of the firm’s levered equity is 19 percent. Each store estimates that annual sales will be $1.575 million; annual cost of goods sold will be $845,000; and annual general and administrative costs will be $505,000. These cash flows are expected to remain the same forever. The corporate tax rate is 25 percent.

  

a.	Use the flow to equity approach to determine the value of the company’s equity. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
b.	What is the total value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

3.

Edwards Construction currently has debt outstanding with a market value of $86,000 and a cost of 7 percent. The company has EBIT of $6,020 that is expected to continue in perpetuity. Assume there are no taxes.

  

a-1.	What is the value of the company's equity? (Do not round intermediate calculations. Leave no cell blank - be certain to enter "0" wherever required.)

a-2.	What is the debt-to-value ratio? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
b.	What are the equity value and debt-to-value ratio if the company's growth rate is 2 percent? (Do not round intermediate calculations and round your "Debt-to-value" answer to 3 decimal places, e.g., 32.161.)
c.	What are the equity value and debt-to-value ratio if the company's growth rate is 6 percent? (Do not round intermediate calculations and round your "Debt-to-value" answer to 3 decimal places, e.g., 32.161.)

Answer 1

Hi

As per policy we will solve only first question here.

1) here market value = $745,000

shares outstanding = 46000

Per share Price = 745000/46000

= $16.196

Total debt = $176,000

interest on debt at 6% = 176000*6% = $10,560

Total share purchased using debt = 176000/16.196

= 10,867 shares

Net Income = EBIT - interest (assuming no tax)

= 66800 - 10560 = $56,240

EPS = Net Income/Total number of shares

= 56240/(46000+10867)

=56240/56867 = $0.99

Hence second option $0.99 is correct answer.

Thanks