Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The Rogers Company is currently in this situation:

  • Sales = 14 million;
  • Variable Cost = 7 million
  • Fixed Cost = 3 million
  • tax rate, T = 35%;
  • value of debt, D = $2 million;
  • k d = 10%;
  • ks = 15%; and
  • Shares of stock outstanding, n = 600,000.

The firm’s market is stable, and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds.

 

  1. What is the total market value of the firm’s stock, S, its price per share, P0, and the firm’s to­tal market value, V?
  2. What is the firm’s weighted average cost of capital?
  3. The firm can increase its debt by $8 million, to a total of $10 million, using the new debt to buy back and retire some of its shares. Its interest rate on all debt will be 12 percent (it will have to call and refund the old debt), and its cost of equity will rise from 15 to 17 percent. EBIT will remain constant. Should the firm change its capital structure?
  4. Calculate the Break-even point of the company.

 

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