Solved by verified expert :1. EBIT, Taxes, and
Leverage. Kaelea,
Inc. has no debt outstanding and a total market value of $90,000. Earnings before interest and taxes, EBIT,
are projected to be $8,000 if the economic conditions are normal. If there is a
strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35
percent lower. Kaelea is considering a
$34,000 debt issue with a 6 percent interest rate. The proceeds will be used to repurchase
shares of stock. There are currently 3,600
sharesoutstanding (Complete a. & b. assuming
Kaelea has a tax rate: 35%).
Calculate earningsper
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.
Repeat part (a) assuming that Kaelea goes through with recapitalization. What do you observe?
2. Calculating WACC. Crosby Industries
has a debt-equity ratio of 1.5. Its WACC
is 9 percent, and its cost of debt is 6 percent. There is no corporate tax.
What is Crosby’s cost of equitycapital?
What would the cost of equity be if the debt-equity ratio were
2.0?
What if it were 0.5? What if it were zero?
3. Dividends
and Stock Prices. Your portfolio is
180 shares of Sunny Morning, Inc. The
stock currently sells for $88 per share.
The company has announced a dividend of $1.90 per share with an
ex-dividend date of April 19. Assuming
no taxes, how much will your stocks be worth on April 19? It is April 19, what is your total
portfolio value?
3.
Stock Dividends. The owners’ equity account ts for Trans World International are
shown here:
Common stock ($1 par value) $30,000
Capital surplus 185,000
Retained earnings
610,000
Total owners’ equity $825,000
a. If Trans World stock currently sells for
$42 per share and a 10 percent stock dividend is declared, how many new shares
will be distributed? Show how the equity accounts would change.
If Trans World declareda
25 percent stock dividend, how would the accounts change?
EXPERT X. J.:
PLEASE ANSWER ALL PROBLEMS FOLLOWING EACH
QUESTION, ON THIS SAME SHEET!!
HIGHLITE ONLY FINAL SOLUTIONS IN BOLD.
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