Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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- Dickson Corporation is comparing two different capital structures. Plan I would result in 26,000 shares of stock and $85,500 in debt. Plan II would result in 20,000 shares of stock and $256,500 in debt. The interest rate on the debt is 6 percent. a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $95,000. The all-equity plan would result in 29,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (Do not round intermediate calculations.) c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.) d-1. Assuming that the corporate tax rate is 22 percent, what is the EPS of the firm? (Do not round intermediate calculations and round your answers to 2…arrow_forwardReynolds Construction's current value of operations is $750 million based on the free cash flow valuation model. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, and $300 million of total debt. What is the best estimate for the firm's value of equity, in millions?.arrow_forwardAAA Corporation and BBB Corporation are identical in every way except their capital structures. AAA Corporation, an all-equity firm, has 40million shares of stock outstanding, currently worth $15 per share. BBB Corporation uses leverage in its capital structure. The market value of BBB’s debt is $100million and its cost of debt is 6.7 percent. Each firm is expected to have earnings before interest of $200 million in perpetuity. Assume that every investor can borrow at 6.7 percent per year. Corporate tax rate is 35%. (SHOW YOUR WORK) 1). What is the value of AAA Corporation? 2). What is the value of BBB Corporation? 3). What is the market value of BBB Corporation’s equity? 4). What would be the BBB’s cost of equity (Rs)? 5). What would be BBB’s weighted average cost of capital (WACC)?arrow_forward
- XYZ is comparing two different capital structures. Plan I would result in 13,000 shares of stock and $130,500 in debt. Plan II would result in 10,000 shares of stock $243,600 in debt. The interest rate on the debt is 10%. a). Ignoring taxes, compare plans I and II to an all equity plan assuming that EBIT will be $56,000. The all equity plan will result in 16,000 shares of stock OUTSTANDING. Which of the 3 plans has the highest EPS? And which has the lowest? b). In part A, what are the break-even levels of EBIT for plan I compared to an all equity plan? What about for plan II I compared to an all equity plan? Is one higher than the other? Why (explain). c). Ignoring taxes, when will EPS be identical for plans I and II?arrow_forwardThere are two firms: Firm U and Firm L. Both firms have $30,000 total assets and $5,000 EBIT (earnings before interest and taxes). Firm U is an unlevered firm without debt, and its number of outstanding shares is 1,000. Firm L is a levered firm financed with 50% debt and 50% common equity. The firm plans to use the debt to repurchase 50% of the outstanding shares (Note: reduce the outstanding shares). The pre-tax cost of debt for Firm L is 10%. Both firms have a 20% corporate tax rate. Calculate the earnings per share (EPS) for the unlevered firm U. A)$3.5 per share B)$5.0 per share C)$4.0 per share D)$5.6 per sharearrow_forward
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