CH.16 Flashcards
Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?
20 million
The projected EBIT of a firm is $300,000. The firm currently has 100,000 shares of common stock outstanding at a value of $18 per share. The firm has no debt. By how much will the ROE change if the firm borrows $600,000 at 8% interest and uses the funds to repurchase shares of stock at the market price? Ignore taxes.
4,33%
Individual investors who lend out part of their personal funds are in fact:
Multiple Choice
Offsetting part of the financial leverage of their investments
Leveraging their investments.
Increasing their total financial leverage.
Eliminating the business risk of their investments.
Increasing their benefits from the interest tax shield.
Offsetting part of the financial leverage of their investments
Lazare Corporation expects an EBIT of $33,000 every year forever. Lazare currently has no debt, and its cost of equity is 16%. The firm can borrow at 10%.
If the corporate tax rate is 35%, what is the value of the firm?
134,062.50
Lazare Corporation expects an EBIT of $33,000 every year forever. Lazare currently has no debt, and its cost of equity is 16%. The firm can borrow at 10%. What will the value be if the company converts to 60% debt?
$162,215.63
Lazare Corporation expects an EBIT of $33,000 every year forever. Lazare currently has no debt, and its cost of equity is 16%. The firm can borrow at 10%.What will the value be if the company converts to 100% debt?
$180,984.38
Martha White’s Fabrics is currently an all-equity firm that has 15,000 shares of stock outstanding at a market price of $12.50 a share. Company management has decided to issue $50,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 9%. What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes.
1.125$
