Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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- You are given the following information concerning a firm:Assets required for operation: $5,100,000Revenues: $8,400,000Operating expenses: $7,850,000Income tax rate: 40%. Management faces three possible combinations of financing: 100% equity financing 30% debt financing with a 8% interest rate 60% debt financing with a 8% interest rate What is the net income for each combination of debt and equity financing? Round your answers to the nearest dollar. 1 2 3 Net income $ $ $ What is the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. 1 2 3 Return on equity % % % If the interest rate had been 16 percent instead of 8 percent, what would be the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. 1 2 3 Return on equity % % % What is the implication of the use of financial leverage…arrow_forwardProblem C: Liquidity RatiosABC has P400,000 cash, P200,000 short‐term investments, P500,000 receivables, and P900,000 inventories. It has trade payables ofP600,000 and short‐term loans of P900,000. It is planning to acquire another short‐term loan. However, the first loan requires ABCto maintain a minimum current ratio of 125%.Required:1. Current ratio before additional loan*2. Current ratio if ABC borrowed P300,000*3. Current ratio if ABC borrows P600,000*arrow_forwardAssume ABC Corporation is a multinational company with the following financial information: Market value of equity (E): $500 million Market value of debt (D): $300 million Market value of preferred stock (PS): $50 million Cost of equity (Re): 10% Cost of debt (BTrd): 5% Corporate tax rate (Tc): 25% Cost of preferred stock ( Rps): 8% a. Calculate the WACC for ABC Corporation. Needs to be done in Excelarrow_forward
- Let's go back to the Double-R Nutting Company. Suppose that Double-R's bonds have a face value of $64. Its current market-value balance sheet is: Book-Value Balance Sheet Assets Net working capital $ 90 Liabilities and Equity Bonds outstanding Fixed assets 80 Common stock $ 95 75 Total assets $ 170 Total liabilities and shareholders' equity $ 170 Who would gain or lose from the following maneuvers? a. Double-R pays a $80 cash dividend. b. Double-R halts operations, sells its fixed assets for $20, and converts net working capital into $90 cash. It invests its $110 in Treasury bills. c. Double-R encounters an investment opportunity requiring a $80 initial investment with NPV = $0. It borrows $80 to finance the project by issuing more bonds with the same security, seniority, and so on, as the existing bonds. d. Double-R finances the investment opportunity in part (c) by issuing more common stock. a. b. C. d. Stockholders Bondholdersarrow_forwardWACC. Grey's Pharmaceuticals has a new project that will require funding of $7.3 million. The company has decided to pursue an all-debt scenario. Grey's has made agreements with four lenders for the needed financing. These lenders will advance the following amounts at the interest rates shown: Click on the Icon D in order to copy its content into a spreadsheet. Lender Amount Interest Rate Steven $2,555,146 12% Yang $2,095,642 11% Shepherd $1,778,883 8% Bailey $870,329 9% What is the weighted average cost of capital for the $7,300,000? % (Round to two decimal places.)arrow_forwardLet's go back to the Double-R Nutting Company. Suppose that Double-R's bonds have a face value of $61. Its current market-value balance sheet is: Assets Book-Value Balance Sheet Liabilities and Equity Net working capital Fixed assets $ 75 Bonds outstanding $ 80 65 Common stock 60 Total assets $ 140 Total liabilities and shareholders' equity $ 140 Who would gain or lose from the following maneuvers? a. Double-R pays a $65 cash dividend. b. Double-R halts operations, sells its fixed assets for $17, and converts net working capital into $75 cash. It invests its $92 in Treasury bills. c. Double-R encounters an investment opportunity requiring a $65 initial investment with NPV = $0. It borrows $65 to finance the project by issuing more bonds with the same security, seniority, and so on, as the existing bonds. d. Double-R finances the investment opportunity in part (c) by issuing more common stock. Stockholders a. b. C. d. Bondholdersarrow_forward
- Solve it using formulas, no tables correct answers are: i) i^2= 0.063977 > 0.0536 iii) Po= £91,630.9 iv) i'= 0.028985 = 2.9% paarrow_forwardVijayarrow_forwardCalculate the aftertax cost of debt under each of the following conditions. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) raw C. Yield 8.0% 8.6 % 6.5 % Corporate Tax Rate 22 % 25 % Aftertax Cost of Debt % % %arrow_forward
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