Question

2. XYZ has total assets of $3,000,000 financed by debt of $2,000,000 and equity capital of $1,000,000. The pretax cost of debt is 6% and the cost of equity capital is given at 10%. XYZ has pretax income (before deduction of interest expense) of $300,000 and is taxed at 40%. Calculate residual income in year 1 (after deducting an equity charge).

3. Same facts as problem 2. XYZ is expected to earn pretax income (before deduction of interest expense) of $300,000 in perpetuity. The book value of XYZ shares is $20 per share. XYZ has 50,000 shares of common stock outstanding. What is the intrinsic value of one share of XYZ common stock.

4. Same facts as problem 3. XYZ expects long term earnings growth to average 7% a year. What is the intrinsic value of XYZ common stock.

Answer #1

2) EBIT = $300,000

I = 6%*$2,000,000 = $120,000

PBT = $180,000

Tax = 0.4 * 180,000 = $72,000

Net Income = $108,000

Equity Charge = Equity Capital * Cost of equity = $1,000,000 * 10% = $100,000

Residual Income = Net Income - Equity Charge = $8,000

3) Present value of expected future residual incomes = RI/r = $8,000/0.1 = $80,000

Intrinsic Value per share = $20 + $80,000/50000 = $21.6

4) Present value of expected future residual incomes = RI(1+g)/(r-g) = $8,000*1.07/(0.1-0.07) = $285,333.33

Intrinsic Value per share = $20 + $285,333.33/50000 = $25.71

Use the following information to estimate the intrinsic value of
VIM’s common stock using the residual income model: VIM had total
assets of $ 3,000,000, financed with twice as much debt capital as
equity capital. VIM’s pre-tax cost of debt is 6 percent and cost of
equity capital is 10 percent. VIM had EBIT of $300,000 and was
taxed at a rate of 40 percent. EBIT is expected to continue at
$300,000 indefinitely. VIM’s book value per share is $...

A company has total stockholders' equity of $2,000,000 and total
debt of $3,000,000. The equity ratio is: 40%. Can someone explain
how to arrive at the 40%?

XYZ Co. is all
equity financed. The equity consists of 1000 common shares with a
market value of $10 per share.
Management is considering
three mutually exclusive uses of $1000 in cash that is not needed
for working capital.
What will be the market price
of XYZ's common stock, the number of shares outstanding, and the
value of the firm
immediately after each of
these alternatives? Ignore tax considerations.
a) Pay a cash dividend of $1
per share.
b) Use...

XYZ Company’s target capital structure is 40% debt and 60%
common equity. The XYZ doesn’t carry any preferred stocks.
Theafter-tax cost of debt is 6.00% and the cost of retained
earnings is 10.25%. The cost of ne issuing stocks is 12%. XYZ
currently has retained earning of 50,000 and needs an additional
capital of $100,000. To maintain the same capital structure, What
is its WACC?

A firm has $25,000,000 of preferred stock and $75,000,000 of
debt. The firm also has 3,000,000 shares of common stock
outstanding, and the current stock price is $50 per share. What is
the weight of common equity (wc) when calculate WACC of this
company?
A. 60%
B. 40%
C. 30%
D. 50%
E. 10%

At the end of 2011, 40% of CARE Software, Inc.'s $1 million in
total assets were debt-financed. The company's cost of debt was 6
percent, and its cost of equity was 12 percent.2011 EBIT was
$200,000, and is expected to remain constant. Income was taxed at
40 percent. The 50,000 shares of common stock outstanding had a
year-end 2011 book value of $12.00 per share. The dividend payout
ratio was 100%.Calculate the intrinsic value of a share of
stock.

Southern Corporation has a capital structure of 40% debt and 60%
common equity. This capital structure is expected not to change.
The firm's tax rate is 34%. The firm can issue the following
securities to finance capital investments:
Debt: Capital can be raised through bank loans at a pretax cost
of 8.5%. Also, bonds can be issued at a pretax cost of 10%.
Common Stock: Retained earnings will be available for
investment. In addition, new common stock can be issued...

ABC Company has €1.2 million in assets that are currently
financed with 100% equity. The company's earnings before interest
and tax is €300,000, and its tax rate is 30%. If ABC changes its
capital structure (recapitalizes) to include 40% debt, what is
ABC's return on equity (ROE) before and after the change? Assume
that the interest rate on debt is 5%. (Note: ROE
= net income / shareholders’ equity

The capital structure of a company consists of debt and equity.
The firm has 100,000 bonds outstanding that are selling at par
value. The par value of each bond is $1,000. Bonds with similar
characteristics are yielding a before-tax return of 8 percent. The
company also has 10 million shares of common stock outstanding. The
stock has a beta of 1.5 and sells for $30 a share. The return on
U.S. Treasury bills is 4 percent and the market rate...

XYZ has a capital structure that is 35 % debt, 5 percent
preferred stock, and 65 %common stock. The pretax cost of debt is
8.25 %, the cost of preferred is 8%, and the cost of common stock
is 117%. The tax rate is 36%. The company is considering a project
that is equally as risky as the overall firm. This project has
initial costs of $550,000 and annual cash inflows of $130,000,
$400,000, and $550,000 over the next 3...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 1 minute ago

asked 28 minutes ago

asked 38 minutes ago

asked 46 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago