Assume that $500 million of Power’s long-term debt is due and the board of directors are meeting to discuss a proposed plan of retiring the $500 million of long-term debt and replace it with additional common stock. It is estimated that the issuance of additional stock will increase the market capitalization by $500 million. What would be the effect of these plans on Power’s Altman Z-score and its perceived risk of bankruptcy had the plan been executed just before the end of 2018? Discuss, and provide calculations to support your analysis.
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Assume that $500 million of Power’s long-term debt is due and the board of directors are meeting to discuss a proposed plan of retiring the $500 million of long-term debt and replace it with additional common stock. It is estimated that the issuance of additional stock will increase the market capitalization by $500 million. What would be the effect of these plans on Power’s Altman Z-score and its perceived risk of bankruptcy had the plan been executed just before the end of 2018? Discuss, and provide calculations to support your analysis.
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- Suppose Tefco Corp. has a value of $131 million if it continues to operate, but has outstanding debt of $160 million that is now due. If the firm declares bankruptcy, bankruptcy costs will equal $22 million, and the remaining $109 million will go to creditors. Instead of declaring bankruptcy, management proposes to exchange the firm's debt for a fraction of its equity in a workout. What is the minimum fraction of the firm's equity that management would need to offer to creditors for the workout to be successful? Tefco could offer its creditors% of the firm in a workout. (Round to one decimal place.) CSuppose Tefco Corp. has a value of $154 million if it continues to operate, but has outstanding debt of $176 million that is now due. If the firm declares bankruptcy, bankruptcy costs will equal $21 million, and the remaining $133 million will go to creditors. Instead of declaring bankruptcy, management proposes to exchange the firm's debt for a fraction of its equity in a workout. What is the minimum fraction of the firm's equity that management would need to offer to creditors for the workout to be successful? Tefco could offer its creditors % of the firm in a workout. (Round to one decimal place.)Viable Enterprises, Inc. is seeking to float a new bond to pay for an expansion of the firm into the Midwest. However, some directors fear that the increase in bankruptcy risk might be greater than any benefits from Viable expanding into new markets. You have been tasked by the CFO with estimating current bankruptcy risks, and you have decided to start by calculating some simple default models. Shares outstanding for Viable are 0.53 million, and market price per share is $10.98. Using the table below, what is the Altman Z-Score (show 2 decimal places)? Current Assets Total Assets Current $12,414 EBIT $5,804 Retained $43,416 $17,028 Earnings $8,467 Liabilities Total $14,459 Liabilities Sales $98,769
- If iOS Corp. issues an additional $8 million of debt and uses this money to retire common stock, what will be the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt, and recall that the WACC under the initial capital structure is 13.85%. Enter your answer as a percentage. Do not include the percentage sign in your answer. Enter your answer rounded to 2 DECIMAL PLACES. TE= Number Click "Verify" to proceed to the next part of the question.The common stock and debt of Northern Sludge are valued at $80 million and $20 million, respectively. Investors currently require a 16.2% return on the common stock and a/an 7.5% return on the debt. If Northern Sludge issues an additional $11 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern’s debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.) The common stock and debt of Northern Sludge are valued at $80 million and $20 million, respectively. Investors currently require a 16.2% return on the common stock and a/an 7.5% return on the debt. If Northern Sludge issues an additional $11 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect…Galaxy Corporation is proposing a recapitalization that would increase its debt level and interest cost. The company will sell new bonds and repurchase shares of its common stock with the proceeds. According to the company's CFO, the initiative will not affect net assets or operating profits, but it will raise earnings per share (EPS). Which of the following statements is CORRECT, assuming the CFO's calculations are correct? * Since the proposed plan raises Galaxy's financial risk, the company's stock price can fall even if EPS rises. More bonds will be issued under the plan, increasing their liquidity and, as a result, lowering the interest rate on the bonds that are currently outstanding. Since the plan is expected to raise EPS, net income is also expected to grow. If the strategy succeeds in increasing EPS, the stock price would rise at the same rate. If the plan decreases the WACC, the stock price is likely to fall as well.
- The common stock and debt of Northern Sludge are valued at $72 million and $12 million, respectively. Investors currently require a 16.4% return on the common stock and/an 7.3% return on the debt. If Northern Sludge issues an additional $12 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern's debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.)The common stock and debt of Northern Sludge are valued at $72 million and $28 million, respectively. Investors currently require a 16.4% return on the common stock and a/an 7.3% return on the debt. If Northern Sludge issues an additional $12 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern’s debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.)The common stock and debt of Northern Sludge are valued at $62 million and $38 million, respectively. Investors currently require a 16.8% return on the common stock and a/an 7.2% return on the debt. If Northern Sludge issues an additional $21 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern’s debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.) What is the new return on equity? ____%
- The common stock and debt of Northern Sludge are valued at $70 million and $30 million, respectively. Investors currently require a 16.0% return on the common stock and a/an 7.7% return on the debt. If Northern Sludge issues an additional $13 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern’s debt and that there are no taxes. a. What is the new return on equity?The common stock and debt of Northern Sludge are valued at $66 million and $34 million, respectively. Investors currently require a return of 15.6% on the common stock and 8.1% on the debt. If Northern Sludge issues an additional $17 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes (do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places).The common stock and debt of Northern Sludge are valued at $56 million and $23 million, respectively. Investors currently require a 15% return on the common stock and an 7% return on the debt. If Northern Sludge Issues an additional $5 million of common stock and uses this money to retire debt, what is the new expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Expected stock return %