PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 17, Problem 13PS
Summary Introduction
To determine: The expected return on the stock.
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The common stock and debt of Northern Sludge are valued at $56 million and $23 million, respectively. Investors currently require a
15% return on the common stock and an 7% return on the debt.
If Northern Sludge Issues an additional $5 million of common stock and uses this money to retire debt, what is the new expected
return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes. (Do
not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Expected stock return
%
The common stock and debt of Northern Sludge are valued at $66 million and $34 million, respectively. Investors currently require a return of 15.6% on the common stock and 8.1% on the debt. If Northern Sludge issues an additional $17 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes (do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places).
Q.An unlevered company that has a current value of $1,600,000 is considering borrowing $700,000 and using the borrowed funds to repurchase shares. The company can borrow at 5% and has a cost of equity of 13%. EBIT is expected to remain the same every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied. What is the company's EBIT according to M&M Proposition I without taxes?
Chapter 17 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - Corporate leverage Reliable Gearing currently is...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 7PSCh. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - Prob. 9PSCh. 17 - Prob. 10PS
Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - MM proposition 2. Increasing financial leverage...Ch. 17 - Prob. 13PSCh. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - MM proposition 2 Look back to Problem 17. Suppose...Ch. 17 - Prob. 19PSCh. 17 - After-tax WACC Gaucho Services starts life with...Ch. 17 - After-tax WACC Omega Corporation has 10 million...Ch. 17 - After-tax WACC Gamma Airlines has an asset beta of...Ch. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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- Question 3 You own all the equity of R.G.C. I Ltd. The company has no debt. The company’s annual cash flow is GH¢900,000 before interest and taxes. The company tax rate is 35%. You have the option to exchange 1/2 of your equity position for 5% bonds with a face value of GH¢2,000,000. What is the value of the unlevered firm? What is the value of the levered firm? Assuming a bankruptcy cost of GH¢8000, what is the value of the levered firm after considering bankruptcy cost?arrow_forwardQuestion 2 A company is all equity financed with 18,000 shares outstanding and each share sells for $22. The company is debating of converting into a 40% debt capital structure, with 6% interest per annum. The cost of capital is currently 10%. Ignore taxes. You are required to answer the following: (a) What is the current market value of the company? (b) What is the market value of debt in the proposed debt capital structure? (c) How many shares must be repurchased in the proposed levered company? (d) What is the cost of equity in the levered company?arrow_forwardQuestions 1 Maynard Inc. has no debt outstanding and a total market value of $250,000. EBIT are projected to be $28,000 if the economic condition is normal. If there is a strong expansion in the economy. then EBIT will be 30% higher. If there is a recession, then EBIT will be 50% lower. Maynard is considering a $90,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. A. Calculate EPS under each of the 3 economic scenarios before any debt is issued. Also calculate the percentage changes in EPS when the economy expands or enter recession. B. Repeat part (a) assuming that the economy goes through with recapitalization. What do you observe? C. Repeat parts a and b in ex. 1 assuming Maynard has a tax rate of 35%.arrow_forward
- 13. A taxable security is yielding 4%. If the company's marginal tax rate is 35%, then a tax-free bond would have to yield ____ % to be comparable. Group of answer choices 4% 4.38% 2.85% 2.6% 14. Which of the following is NOT an optimal use for short-term excess cash? Group of answer choices put the cash in a highly liquid, interest bearing account repurchase stock Pay down credit lines make overnight investmentsarrow_forwardS ery//ua/69158/45467554/aHR0cHM6Ly9mMS5hcHAUZWRtZW50dW0uY29tL2xlYXJuZXItdWk... Unit Activity: Mathematical Models and Investments 15px Space used (includes formatting): 0/15000 The ra Part C Since she was 25, Jenna has been saving $5,000 each year in her IRA. Her IRA earns a 6% return on average. If that continues, she will have over $870,000 in savings by age 65, enough for a retirement income of around $65,000 a year. Jenna figures that $60,000 is more than enough, so she wants to retire early at age 62. She calculates that her savings will only be $15,000 less, since she saves just $5,000 a year. Give a reason why Jenna's calculation is incorrect and explain your answer? B I U X² X₂ 三三三三三三 V Unit 2 +arrow_forwardIf iOS Corp. issues an additional $8 million of debt and uses this money to retire common stock, what will be the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt, and recall that the WACC under the initial capital structure is 13.85%. Enter your answer as a percentage. Do not include the percentage sign in your answer. Enter your answer rounded to 2 DECIMAL PLACES. TE= Number Click "Verify" to proceed to the next part of the question.arrow_forward
- The common stock and debt of Northern Sludge are valued at $72 million and $12 million, respectively. Investors currently require a 16.4% return on the common stock and/an 7.3% return on the debt. If Northern Sludge issues an additional $12 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern's debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.)arrow_forwardMarcus Inc., a manufacturing firm with no debt outstanding and a market value of $100 million is considering borrowing $ 40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 21%, answer the following question: Estimate the present value of all future interest tax savings, assuming that the debt change is permanent. Group of answer choices a. 21m b. 8.4m c. 0.756m d. 1.89marrow_forwardThe common stock and debt of Northern Sludge are valued at $80 million and $20 million, respectively. Investors currently require a 16.2% return on the common stock and a/an 7.5% return on the debt. If Northern Sludge issues an additional $11 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern’s debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.) The common stock and debt of Northern Sludge are valued at $80 million and $20 million, respectively. Investors currently require a 16.2% return on the common stock and a/an 7.5% return on the debt. If Northern Sludge issues an additional $11 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect…arrow_forward
- The common stock and debt of Northern Sludge are valued at $72 million and $28 million, respectively. Investors currently require a 16.4% return on the common stock and a/an 7.3% return on the debt. If Northern Sludge issues an additional $12 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern’s debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.)arrow_forwardAssume capital markets are perfect. Kabo Industries currently has $12 million invested in shortterm Treasury securities paying 8%, and it pays out the interest payments on these securitieseach year as a dividend. The board is considering selling the Treasury securities and paying outthe proceeds as a one-time dividend payment.i. If the board went ahead with this plan, what would happen to the value of Kabo stock uponthe announcement of a change in policy?ii. What would happen to the value of Kabo stock on the ex-dividend date of the one-timedividend?iii. Given these price reactions, will this decision benefit investors?arrow_forwardThe common stock and debt of Northern Sludge are valued at $70 million and $30 million, respectively. Investors currently require a 16.0% return on the common stock and a/an 7.7% return on the debt. If Northern Sludge issues an additional $13 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern’s debt and that there are no taxes. a. What is the new return on equity?arrow_forward
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