Northern Wood Products is an all-equity firm with 21,900shares of stock outstanding and a total market value of $368,000. Based on its current capital structure, the firm isexpected to have earnings before interest and taxes of $34,000 if the economy is normal, $20,400 if the economy isin a recession, and $47,600 if the economy booms. Ignoretaxes. Management is considering issuing $92,800 of debtwith an interest rate of 6 percent. If the firm issues the debt,the proceeds will be used to repurchase stock. What will theearnings per share be if the debt is issued and the economyis in a recession? Multiple Choice $68 $1.74 $91 $1.24 $2.57 Northern Wood Products is an all-equity firm with 21,900 shares of stock outstanding and a total market value of $368,000. Based on its current capital structure,the firm is expected to have earnings before interest and taxes of $34,000 if the economy is normal, $20,400 if the economy is in a recession, and $47,600 if theeconomy booms. Ignore taxes. Management is considering issuing $92,800 of debt with an interest rate of 6 percent. If the firm issues the debt, the proceeds willbe used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession?Multiple Choice$.68$1.74$.91$1.24

The earnings per share is calculated by dividing the earnings available to equity holders by the…

Northern Wood Products is an all-equity firm with 21,900 shares of stock outstanding and a total market value of $368,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $34,000 if the economy is normal, $20,400 if the economy is in a recession, and $47,600 if the economy booms. Ignore taxes. Management is considering issuing $92,800 of debt with an interest rate of 6 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession? Multiple Choice O O $.68 $1.74 $.91 $1.24

Northern Wood Products is an all-equity firm with 21,900 shares of stock outstanding and a total market value of $368,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $34,000 if the economy is normal, $20,400 if the economy is in a recession, and $47,600 if the economy booms. Ignore taxes. Management is considering issuing $92,800 of debt with an interest rate of 6 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession? Multiple Choice O O $.68 $1.74 $.91 $1.24

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The finance director of Netra co wishes to estimate what impact the introduction of debt finance is likely to have on the company’s overall cost of capital. The company is currently financed only by equity. Ordinary Shares ( 25 cents par value ) 500,000 Reserves 1,100,000 Total Equity 1,600,000 The company’s current share price is 420 cents, and up to $4 million of fixed rate five year debt could be raised at an interest rate of 10% per year. The corporate tax rate is 33%.The current earnings before interest and tax are $2.5 million. These earnings are not expected to change significantly for the foreseeable future. The company is considering raising either: a) $2 million in debt finance; or b) $4 million in debt finance In either case the debt finance will be used to repurchase ordinary shares. Required: i) Using Modigliani and Miller’s model in a world with corporate tax, estimate…
Robert Downey is the new finance manager in Avengers Corporation. The companies were considering expanding their business internationally. Currently the 9-month treasury bills are at 5.2 percent and the company risk premium is at 10 percent. The domestic beta is estimated at 1.2 while the international beta at 1.45. The company's capital structure comprises of 40 percent debts and the balance is equity. He also has gathered the other financial details as following: Assumptions Domestic International (%) (%) 8 12.5 Cost of debt, before tax Corporate income tax Return on market portfolio 20 30 15.0 18 Based on the information given, compute the Weighted Average Cost of Capital (WACC) for both domestic and international company.
Northern Wood Products is an all-equity firm with 16,000 shares of stock outstanding and a total market value of $352,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $26,000 if the economy is normal, $3,000 if the economy is in recession, and $33,000 if the economy booms. Ignore taxes. Management is considering issuing $88,000 of debt with a 6 percent coupon rate. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession? A=-$0.19 B=-$0.27 C=$0.03 D=$0.26 E=$0.31
Fujita, Incorporated, has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $42,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $100,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for this problem. a-1. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded…
Ornaments, Inc., is an all-equity firm with a total market value of $652,000 and 31,700 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $93,400 if the economy is normal. If there is a recession, EBIT will be 20 percent lower, and if there is a boom, EBIT will be 30 percent higher. The tax rate is 40 percent. What is the EPS in a recession? $1.77 $2.30 $1.24 $1.41 $2.12
Fowler, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 25 percent lower. The firm is considering a debt issue of $60,000 with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. The firm has a tax rate 25 percent. Assume the stock price is constant under all scenarios. a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate…
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Manshukh
Northern Wood Products is an all-equity firm with 20,700 shares of stock outstanding and a total market value of $365,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $32,500 if the economy is normal, $19,200 if the economy is in a recession, and $45,800 if the economy booms. Ignore taxes. Management is considering issuing $91,900 of debt with an interest rate of 7 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession?
Kaur Resources is an unlevered firm with a total market value of $460,000 and 10, 000 shares of stock outstanding. The firm has expected EBIT of $22, 000 if the economy is normal and $35, 000 if the economy booms. The firm is considering a bond issue of $73, 600 with an attached interest rate of 6.8 percent. The bond proceeds will be used to repurchase shares. The tax rate is 21 percent. What will be the earnings per share after the repurchase if the economy is normal? Multiple Choice $2.02 $1.70 $1.60 $2.62 $1.34
LANY Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $2,400,000, its fixed assets turnover ratio equals 3.0, and its debt and common equity are each 50% of total assets which is composed of fixed and current assets. EBIT is $130,000, the interest rate on the firm's debt is 8%, and the tax rate is 30%. If the company follows a restricted policy, its total assets turnover will be 2.4. Under a relaxed policy its total assets turnover will be 2.0. 1.) How much would be the current assets under relaxed policy? Use 2 decimal places for your final answer 2.) Refer to the previous item, what is the projected ROE under the restricted policy? Use 2 decimal places for your final answer 3.) Refer to the previous item, what is the TIE ratio under the relaxed policy? Use 2 decimal places for your final answer
Fujita, Incorporated, has no debt outstanding and a total market value of $422,400. Earnings before interest and taxes, EBIT, are projected to be $55,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 20 percent lower. The company is considering a $205,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,800 shares outstanding. Ignore taxes for questions (a) and (b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. a-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be…

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