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

Your company doesn't face any taxes and has $750 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 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 in either event.What will be the level of expected EPS if they switch to the proposed capital structure?

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 standard deviation in EPS if they switch to the proposed capital structure?

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 has a 25 percent 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 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 9 percent yield on perpetual debt in either event.What will be the break-even level of EBIT?

Suppose that Lil John Industries' equity is currently selling for $64 per share and that there are 1 million shares outstanding.If the firm also has 20 thousand bonds outstanding,which are selling at 108 percent of par ($1,000),what are the firm's current capital structure weights?

Your company faces a 30 percent 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 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 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?

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 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 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?

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 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 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?

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 break-even level of EBIT?

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 fund the next $4 million of assets for future projects entirely with debt,resulting in the desired capital structure at some point in the future.This is an example of:

Which of the following is a feature of the "perfect world" in M&M's theorem for optimal capital structure?

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

Why,in finance,do we refer to using debt within a firm's capital structure as leverage?

No Nuns Cos.has a 20 percent tax rate and has $100 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 shown as follows: The firm is considering switching to a 10 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,their theorem's two main propositions are referred to as which of the following?

Which of these is the assumption that decisions about which projects to fund are separate from the decisions about how to fund them?

If an investor wanted to reduce the risk of a levered stock in their portfolio,how could they go about doing so while still retaining shares in the company?

Which of the following is the condition in which a firm is near bankruptcy?

If a firm changes their capital structure by immediately selling additional claims of one type of capital and using the proceeds to retire another kind of claims,they are using which type of capital structure change?

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?