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

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 shown as follows: 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?

Why does allowing for the existence of corporate taxation cause firms to prefer the maximum amount of debt possible?

The Modigliani-Miller (M&M)theorem states that:

Your company doesn't face any taxes 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 shown as follows: 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 standard deviation in EPS if they switch to the proposed capital structure?

Describe "The More Debt,The Better" statement with regard to the optimal capital structure.

Which of these is the rule under which claimants are paid in a Chapter 7 bankruptcy?

JJJ Corp.has $10 million in assets and is currently financed with 100 percent equity.The firm decides to switch to a 60 percent equity/40 percent debt structure and decides to sell $4 million of debt and use the proceeds to retire $4 million in equity today.This is an example of:

If a firm changes their capital structure by waiting until the firm requires additional capital to cover capital budgeting needs and then selling more of the type of claims they wish to increase,they are using which type of capital structure change?

Suppose that a company's equity is currently selling for $30 per share and that there are 5 million shares outstanding.If the firm also has 20 thousand bonds outstanding,which are selling at 98 percent of par ($1,000),what are the firm's current capital structure weights for equity and debt respectively?

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 shown as follows: 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?

Differentiate between active and passive changes to capital structure.

Which of the following statements is correct?

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 shown as follows: 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?

A situation that arises when a firm's equity is close to worthless,and equity holders will prefer to invest in overly risky projects with a small chance of success rather than simply paying debt holders their regularly scheduled payments is known as a(n):

Daddi Mac,Inc.,doesn't face any taxes and has $250 million in assets,currently financed entirely with equity.Equity is worth $13 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 shown as follows: The firm is considering switching to a 25 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?

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?

Define the Modigliani-Miller (M&M)theorem and list the four features of their "perfect world."

An all-equity financed firm has $350 in assets and the stock price is $10.If the firm restructures with 20 percent debt which creates interest expense of $14 per year and the firm's tax rate is 40 percent,what is the break-even EBIT?

Daddi Mac,Inc.,doesn't face any taxes and has $250 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 shown as follows: The firm is considering switching to a 30 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?

If bondholders of a firm in financial distress felt that they could recoup more of their investment by renegotiating their claims with the firm and allowing it to continue to operate,what type of bankruptcy would they probably push for?