You have the following information about two firms, Debt Free, Incorporated and Debt Spree, Incorporated. Both firms have the sameprospects for sales and EBIT, and both have the same level of assets, tax rate and borrowing rate. They differ in their use of debtfinancing.ScenarioBad yearNormal yearGood yearTotal assetsTax rateDebtEquityBorrowing rateSalesInterest expense for Debt FreeInterest expense for Debt Spree$200$275$380Debt Free$ 25021%EBIT$12$ 34$ 51$0$ 25016%Required:a. Calculate the interest expense for each firm:Debt Spree$ 25021%$150$ 10016% Required:a. Calculate the interest expense for each firm:Interest expense for Debt FreeInterest expense for Debt Spreeb. Calculate the following items for each firm for each scenario (bad year, normal year, good year): return on assets (ROA), net profit,and return on equity (ROE). (Use a minus sign to indicate negative answers. Round your answers to 2 decimal places.)ScenarioBad yearNormal yearGood yearROA%%%Debt FreeNet ProfitROE%%%ROA%%%Debt SpreeNet ProfitROE%%%

Interest expense = Debt * Borrowing rateROA = Net profit / Total assetsNet profit = EBIT * (1 - Tax…

Answered: You have the following information…

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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A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $3 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows: Industry Average Ratios Current ratio 2 × Fixed assets turnover 6 × Debt-to-capital ratio 19 % Total assets turnover 3 × Times interest earned 7 × Profit margin 5.75 % EBITDA coverage 9 × Return on total assets 17.25 % Inventory turnover 7 × Return on common equity 19.40 % Days sales outstandinga 23 days Return on invested capital 17.30 % aCalculation is based on a 365-day year. Balance Sheet as of December 31, 2021 (millions of dollars) Cash and equivalents $ 77 Accounts payable $ 48 Accounts receivables 72 Other current liabilities 29 Inventories 178 Notes payable 58 Total current assets $ 327…
DuPONT ANALYSIS A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the DuPont equation. The firm has no lease payments but has a $2 million sinking fund payment on its debt. The most recent industry average ratios and the firm’s financial statements are as follows: Industry Average Ratios Current ratio 3x Fixed assets turnover 6x Debt-to-capital ratio 20% Total assets turnover 3x Times intereset earned 7x Profit margin 3.75% EBITDA coverage 9x Return on total assets 11.25% Inventory turnover 10x Return on common equity 16.10% Days sales outstanding 24 days Return on invested capital 14.40% aCalculate is based on 365-day year.Balance Sheet as of December 31, 2019 (millions of dollars) Cash and equivalents $78 Accounts payable $45 Accounts receivable 66 other current liabilities 11 Inventories 159 Notes payable 29 Total current assets $303 Total current liabilities $85 Long term…
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Bank A receives $70 in deposits at 5% and, together with 40 in equity, makes a loan of $90 at 7%. The remaining of assets is G-Bond. We will ignore taxes for the moment. NIM=Profit/Interest revenue Bank A Loan 7% $90 G-Bond 5% ? Deposits 5% $70 Equity $40 Total Assets $? Total Equity and Deposit $110 ROE= 66.66% 22.3% 32.6% 4.8% 9.5% 10.4% 52.13% 8.8%
Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table. Table 1: Information of the firms Unlevered firm Levered firm EBIT 10,000 10,000 Interest 0 3,200 Taxable income 10,000 6,800 Tax (tax rate: 34%) 3,400 2,312 Net income 6,600 4,488 CFFA 0 -3,200 Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5 Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equity
Need help with the 2 incorrect questions
The following information is available regarding XYZ Co. sales = $250,000net income = $35,000dividends = $10,000total debt = $100,000total equity = $80,000 What growth rate can be supported without outside financing?
Case 2: The risk-free rate is 1.20%, return on market is 13.00%, and corporate tax rate is 20%. Baltic & Friends Corporation is considering four levels of debt financing as in the table below. The manager wishes to select "the right proportion" of debt financing for the company. Currently the firm has no debt financing, and its beta equals 0.85. D/A ratio (%) Interest rate before tax (%) 10 3.80% 25 4.20% 40 4.75% 55 4.90% Questions Answers 1. Calculate cost of equity with leveraged beta at 10% debt 2. Calculate cost of equity with leveraged beta at 25% debt 3. Calculate cost of equity with leveraged beta at 40% debt 4. Calculate cost of equity with leveraged beta at 55% debt % % % % 5. Calculate WACC at 10% debt 6. Calculate WACC at 25% debt 7. Calculate WACC at 40% debt 8 Calculate WACC at 55% debt di % % % %
1. Determine the cost of Debt of the company
Assume you are given the following information for firms A and B: A B D $1,563,400.00 $2,357,316.00 E $2,051,347.00 $1,257,431.00 Price $31.25 $31.25 i 13.52% 13.52% EBIT $97,347.00 $97,347.00 No taxes How do you replicate an investment in 79% of stock B by using stock A? What is the return of the replicating strategy?
If the cost of debt for Oman cement is 8.15% (effective rate) and its tax rate is 24% then what is the after tax cost of debt? Select one: a. 61.9% b. None c. 6.10% d. 6.19% e. 0.619%
Fujita, Incorporated, has no debt outstanding and a total market value of $450,000. Earnings before interest and taxes, EBIT, are projected to be $57,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 16 percent higher. If there is a recession, then EBIT will be 24 percent lower. The company is considering a $215,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 9,000 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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