Capital Structure: Basic Concepts
1. 【EBIT and Leverage】 Money, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $14,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then EBIT will be 60 percent lower. Money is considering a $60,000 debt issue with a 5 percent interest rate. The proceeds will be ud to repurcha shares of stock. There are currently 2,500 shares outstanding. Ignore taxes for this problem.
a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a recession.
b. Repeat part (a) assuming that Money goes through with recapitalization. What do you obrve?
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4. 【Break-Even EBIT】 Rolston Corporation is comparing two different capital structures, an allequity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 150,000 shares of stock outstanding. Under Plan II, there would be 60,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes.
学习改变命运a. If EBIT is $200,000, which plan will result in the higher EPS?
b. If EBIT is $700,000, which plan will result in the higher EPS?
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5.【 MM and Stock Value】 In Problem 4, u MM Proposition I to find the price per share of equity under each of the two propod plans. What is the value of the firm?
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13. 【Calculating WACC】 Shadow Corp. has no debt but can borrow at 8 percent. The firm’s WACC is currently 12 percent, and the tax rate is 35 percent.
a. What is Shadow’s cost of equity?
b. If the firm converts to 25 percent debt, what will its cost of equity be?
生活大爆炸3c. If the firm converts to 50 percent debt, what will its cost of equity be?
d. What is Shadow’s WACC in part (b)? In part (c)?
18. 英语6级词汇【Firm Value】 Old School Corporation expects an EBIT of $9,000 every year forever. Old School currently has no debt, and its cost of equity is 17 percent. The firm can borrow at 10 percent. If the corporate tax rate is 35 percent, what is the value of the firm? What will the value be if Old School converts to 50 percent debt? To 100 percent debt?
19. 【MM Proposition I with Taxes】 The Maxwell Company is financed entirely with equity. The company is considering a loan of $1 million. The loan will be repaid in equal installments over the next two years, and it has an 8 percent interest rate. The company’s tax rate is 35 percent. According to MM Proposition I with taxes, what would be the increa in the value of thecompany after the loan?
21. 【Cost of Capital】 Acetate, Inc., has equity with a market value of $20 million and debt with a market value of $10 million. The cost of the debt is 14 percent per year. Treasury bills that mature in one year yield 8 percent per year, and the expected return on the market portfolio over the next year is 18 percent. The beta of Acetate’s equity is .90. The firm pays no taxes.河北教育考试院成绩查询
a. What is Acetate’s debt-equity ratio?
跨平台b. What is the firm’s weighted average cost of capital?
c. What is the cost of capital for an otherwi identical all-equity firm?
25. 【MM with Taxes】 Williamson, Inc., has a debt-to-equity ratio of 2.5. The firm’s weighted average cost of capital is 15 percent, and its pretax cost of debt is 10 percent. Williamson is subject to a corporate tax rate of 35 percent.
a. What is Williamson’s cost of equity capital?
b. What is Williamson’s unlevered cost of equity capital?
c. What would Williamson’s weighted average cost of capital be if the firm’s debt-to-equity ratio were .75? What if it were 1.5?
29. 【Stockholder Risk】 Suppo a firm’s business operations are such that they mirror movements in the economy as a whole very cloly, that is, the firm’s ast beta is 1.0. U the result of previous problem to find the equity beta for this firm for debt-equity ratios of 0, 1, 5, and 20. What does this tell you about the relationship between capital structure and shareholder risk? How is the shareholders’ required return on equity affected? Explain.
【Solutions】
夏令营成都1. pdca. A table outlining the income statement for the three possible states of the economy is shown below. The EPS is the net income divided by the 2,500 shares outstanding. The last row shows the percentage change in EPS the company will experience in a recession or an expansion economy.
