EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 14, Problem 9P
Summary Introduction
To determine: The probability of having negative earnings per share.
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Blums Inc. expects its operating income over the coming year to equal $1.3 million, with a standard deviation of $195,000. Its coefficient of variation is equal to 0.15. Blums must pay interest charges of $800,000 next year and preferred stock dividends of $150,000. Blums’ marginal tax rate is 40 percent. What is the probability that Blums will have negative earnings per share next year? (Assume that operating income is normally distributed.) Use Table V to answer the question. Round your answer to two decimal places.
%
Grommit Engineering expects to have net income next year of $24.36 million and free cash flow of $22.17
million. Grommit's marginal corporate tax rate is 35%.
a. If Grommit increases leverage so that its interest expense rises by $6.7 million, how will net income
change?
b. For the same increase in interest expense, how will free cash flow change?
a. If Grommit increases leverage so that its interest expense rises by $6.7 million, how will net income
change?
Net income will fall to $ 4.36 million. (Round to two decimal places.)
b. For the same increase in interest expense, how will free cash flow change? (Select the best choice
below.)
A. Free cash flow increases by the amount of the interest expense.
B. Free cash flow decreases by the amount of the interest expense.
C. Free cash flow is not affected by interest expense.
D. None of the above.
Your company faces a 30% tax rate and has $264 million in assets, currently financed entirely with equity. Equity is worth $9.40 per share, and a book value of equity is equal to the market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:
State
Pessimistic
Optimistic
Probability of State
.30
.70
Expect EBIT in State
$11.4 million
$51.4 million
The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 11 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure? (Round your intermediate calculations and final answer to 2 decimal places, except calculation of number of shares which should be rounded to nearest whole number.)
Chapter 14 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 14.A - Prob. 1QTDCh. 14.A - Prob. 2QTDCh. 14.A - Prob. 3QTDCh. 14.A - Prob. 2PCh. 14.A - Prob. 3PCh. 14.A - Prob. 4PCh. 14.A - Prob. 5PCh. 14.A - Prob. 6PCh. 14.A - Prob. 7PCh. 14.A - Prob. 8P
Ch. 14 - Prob. 1QTDCh. 14 - Prob. 2QTDCh. 14 - Prob. 3QTDCh. 14 - Prob. 4QTDCh. 14 - Prob. 5QTDCh. 14 - Prob. 6QTDCh. 14 - Prob. 7QTDCh. 14 - Prob. 8QTDCh. 14 - Prob. 9QTDCh. 14 - Prob. 10QTDCh. 14 - Prob. 11QTDCh. 14 - Prob. 1PCh. 14 - Prob. 2PCh. 14 - Prob. 3PCh. 14 - Prob. 4PCh. 14 - Prob. 5PCh. 14 - Prob. 6PCh. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Prob. 9PCh. 14 - Prob. 10PCh. 14 - Prob. 11PCh. 14 - Prob. 12PCh. 14 - Prob. 13PCh. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Prob. 16PCh. 14 - Prob. 17PCh. 14 - Prob. 18PCh. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Prob. 21PCh. 14 - Prob. 22PCh. 14 - Prob. 23PCh. 14 - Prob. 24PCh. 14 - Prob. 25PCh. 14 - Prob. 26PCh. 14 - Prob. 27PCh. 14 - Prob. 28PCh. 14 - Prob. 29PCh. 14 - Prob. 30PCh. 14 - Prob. 31PCh. 14 - Prob. 32PCh. 14 - Prob. 33PCh. 14 - Prob. 34P
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