EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 15, Problem 9P
a.
Summary Introduction
To Discribe: The factors that can we cite for the accounts of phenomenon.
b.
Summary Introduction
To Discribe: The suggestion of an optimal dividend policy for both the companies, and that might increase in both of the share price.
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Consider two firms that are identical in every respect EXCEPT for their capital structures. The unlevered firm is financed entirely by equity whereas the capital structure of the levered firm includes $30,000 of debt at 12%.The annual earnings of both companies before interest are the same, $10,000. The cost of equity in the unlevered firm is 15% and in the levered company at 16%.
A) Determine the market values of the two companies.
B) Suppose an investor owns 1% of the equity in the levered firm, describe the arbitrage process.
Two firms, No Leverage Inc. and High Leverage Inc. have equal levels of operating risk and differ only in their capital structure. No Leverage is unlevered and High Leverage has $400,000 of perpetual debt in its capital structure. Assume that the perpetual annual income of both firms available for stockholders is paid out as dividends. Hence, the growth rate for both firms is zero. The income tax rate for both firms is 40 percent. Assume that there are no financial distress costs or agency costs. You are given the following data:
No Leverage, Inc.
High Leverage, Inc.
Equity in capital structure
$
800,000
$
400,000
Cost of equity, ke
12.5
%
20
%
Debt in capital structure
-
$
400,000
Pretax cost of debt, kd
-
5
%
Net operating income (EBIT)
$
100,000
$
100,000
Determine the
Market value of No Leverage, Inc. Round your answer to the nearest dollar.$
Market value of High Leverage, Inc. Round your answer to the…
Ivanhoe Corp. is a medium-sized corporation specializing in quarrying stone for building construction. The company has long dominated the market, at one time achieving a 70% market penetration. During prosperous years, the company’s profits, coupled with a conservative dividend policy, resulted in funds available for outside investment. Over the years, Ivanhoe has had a policy of investing idle cash in equity securities. In particular, Ivanhoe has made periodic investments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstanding common stock of Norton Industries, Ivanhoe does not have significant influence over the operations of Norton Industries.Cheryl Thomas has recently joined Ivanhoe as assistant controller, and her first assignment is to prepare the 2020 year-end adjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gathered the following information about…
Chapter 15 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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