Exam 16: Assessing Long-Term Debt, Equity, and Capital Structure

Suppose that a company's equity is currently selling for $55 per share and that there are 1 million shares outstanding. If the firm also has 50 thousand bonds outstanding, which are selling at 95 percent of par ($1,000), what are the firm's current capital structure weights for equity and debt respectively?

Which of the following is NOT a feature of the "perfect world" in M&M's theorem for optimal capital structure?

Explain why utility firms tend to have fairly high debt ratios.

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to 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: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

Your company has a 25% tax rate and has $600 million in assets, currently financed entirely with equity. Equity is worth $20 per share, and book value of equity is equal to 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: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

Suppose that a company's equity is currently selling for $45 per share and that there are 1 million shares outstanding. If the firm also has 7 thousand bonds outstanding, which are selling at 97 percent of par ($1,000), what are the firm's current capital structure weights for equity and debt respectively?

An all-equity financed firm has $500 in assets and the stock price is $20. If the firm restructures with 15% debt which creates interest expense of $30 per year and the firm's tax rate is 40%, what is the break-even EBIT?

No Nuns Cos. has a 20 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $80 per share, and book value of equity is equal to 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: The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay an 7 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if the firm switches to the proposed capital structure?

Your company doesn't face any taxes and has $200 million in assets, currently financed entirely with equity. Equity is worth $25 per share, and book value of equity is equal to 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: The firm is considering switching to a 40-percent debt capital structure, and has determined that they would have to pay a 7 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

Which of the following is a true statement regarding Proposition I?

Your company faces a 30% tax rate and has $300 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to 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: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

Your company has a 38% tax rate and has $800 million in assets, currently financed entirely with equity. Equity is worth $60 per share, and book value of equity is equal to 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: The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the break-even level of EBIT?

Your company doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to 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: The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

In M&M's perfect world, will the debtholders ever bear any of the risk of the firm?

Suppose that a company's equity is currently selling for $22 per share and that there are 4 million shares outstanding and 30 thousand bonds outstanding, which are selling at 101 percent of par ($1,000). If the firm was considering an active change to their capital structure so that the firm would have a D/E of 0.9, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell?

Your company doesn't face any taxes and has $500 million in assets, currently financed entirely with equity. Equity is worth $40 per share, and book value of equity is equal to 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: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

This type of bankruptcy involves an attempt to allow the firm to reorganize the business under court supervision.

Which of the following is a true statement?

If the U.S. government completely eliminated taxation at the corporate level:

GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to 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: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 5 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?