Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 17, Problem 3CQ
Capital Structure Decisions Due to large losses incurred in the past several years, a firm has $2 billion in tax loss carryforwards. This means that the next $2 billion of the firm’s income will be free from corporate income taxes. Security analysts estimate that it will take many years for the firm to generate $2 billion in earnings. The firm has a moderate amount of debt in its capital structure. The firm's CEO is deciding whether to issue debt or equity to raise the funds needed to finance an upcoming project. Which method of financing would you recommend? Why?
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Students have asked these similar questions
Assume that a firm starts out as an all equity firm with $1,000,000 of equity, $1,000,000 of assets,
and a return on assets (ROA) of 10 percent. Also assume that management then makes the decision
to issue $200,000 of debt, at a before-tax rate of 5 percent, and use the proceeds to buy back
$200,000 of equity. Based on this information, and assuming that the firm's tax rate is 40 percent,
determine what the return on equity (ROE) will be after the buy back.
O 10.50%
14.25%
O 11.75 %
13.00%
O 15.50%
The Fitness Studio, Incorporated's income statement lists the following income and expenses: EBITDA = $949,000, EBIT = $780,000,
interest expense = $126,000, and taxes = $228,900. The firm has no preferred stock outstanding and 100,000 shares of common
stock outstanding.
Calculate the earnings per share.
Note: Round your answer to 2 decimal places.
Earnings per share
Optimal Capital Structure with
Hamada
Beckman Engineering and Associates
(BEA) is considering a change in its
capital structure. BEA currently has $20
million in debt carrying a rate of 8%,
and its stock price is $40 per share with
2 million shares outstanding. BEA is a
zero-growth firm and pays out all of its
earnings as dividends. The firm's EBIT is
$18 million, and it faces a 25% federal-
plus-state tax rate. The market risk
premium is 4%, and the risk-free rate is
6%. BEA is considering increasing its
debt level to a capital structure with
40% debt, based on market values, and
repurchasing shares with the extra
money that it borrows. BEA will have to
retire the old debt in order to issue new
debt, and the rate on the new debt will
be 10%. BEA has a beta of 1.2.
a. What is BEA's unlevered beta? Use
market value D/S (which is the same
as wd/ws) when unlevering. Do not
round intermediate calculations.
Round your answer to two decimal
places.
Chapter 17 Solutions
Corporate Finance
Ch. 17 - Bankruptcy Costs What are the direct and indirect...Ch. 17 - Stockholder Incentives Do you agree or disagree...Ch. 17 - Capital Structure Decisions Due to large losses...Ch. 17 - Cost of Debt What steps can stockholders take to...Ch. 17 - MM and Bankruptcy Costs How does the existence of...Ch. 17 - Agency Costs of Equity What are the sources of...Ch. 17 - Observed Capital Structures Refer to the observed...Ch. 17 - Bankruptcy and Corporate Ethics As mentioned in...Ch. 17 - Bankruptcy and Corporate Ethics Finns sometimes...Ch. 17 - Prob. 10CQ
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