ACCOUNTING

ACCOUNTING  

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   Q.2      The Dybvig Corporation’s common   stock has a beta of 1.2. If the risk-free rate is 5.2 percent and the   expected return on the market is 10 percent, what is Dybvig’s cost of equity   capital? (Do not round intermediate calculations and   round your final answer to 2 decimal places. (e.g., 32.16))            Cost of equity   capital    %             Q.3 Advance, Inc., is trying to   determine its cost of debt. The firm has a debt issue outstanding with 18   years to maturity that is quoted at 107 percent of face value. The issue   makes semiannual payments and has a coupon rate of 8 percent annually.          What is Advance’s pretax cost of   debt? (Do not round intermediate calculations and round   your answer to 2 decimal places. (e.g., 32.16))            Cost of debt    %              If the tax rate is 35 percent,   what is the aftertax cost of debt? (Do not round intermediate calculations and round your answer   to 2 decimal places. (e.g., 32.16))            Cost of debt    %                  Q6. Problem 13-5 Calculating WACC          Mullineaux Corporation has a   target capital structure of 80 percent common stock and 20 percent debt. Its   cost of equity is 17 percent, and the cost of debt is 11 percent. The   relevant tax rate is 35 percent.          What is Mullineaux’s WACC? (Do not round intermediate calculations and round your answer   to 2 decimal places. (e.g., 32.16))              Q8 Miller Manufacturing has a   target debt–equity ratio of 0.60. Its cost of equity is 15 percent, and its   cost of debt is 4 percent. If the tax rate is 35 percent, what is Miller’s   WACC? (Do not round   intermediate calculations and round your final answer to 2 decimal places.   (e.g., 32.16))             WACC    %                  Q9 Och, Inc., is considering a   project that will result in initial aftertax cash savings of $1.72 million at   the end of the first year, and these savings will grow at a rate of 2 percent   per year indefinitely. The firm has a target debt–equity ratio of .8, a cost   of equity of 11.2 percent, and an aftertax cost of debt of 4.0 percent. The   cost-saving proposal is somewhat riskier than the usual projects the firm   undertakes; management uses the subjective approach and applies an adjustment   factor of +1 per cent to the cost of capital for such risky projects.          What is the maximum initial cost   of company would be willing to pay for the project? (Do   not round intermediate calculations. Enter your answer in dollars, not   millions of dollars, i.e. 1,234,567.)            Maximum   cost     $                   Q13 Money, Inc., has no debt   outstanding and a total market value of $240,000. Earnings before interest   and taxes, EBIT, are projected to be $28,000 if economic conditions are   normal. If there is strong expansion in the economy, then EBIT will be 12   percent higher. If there is a recession, then EBIT will be 25 percent lower.   Money is considering a $140,000 debt issue with an interest rate of 6   percent. The proceeds will be used to repurchase shares of stock. There are   currently 12,000 shares outstanding. Money has a tax rate 35 percent.            Calculate earnings per share   (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your final   answers to 2 decimal places. (e.g., 32.16))              EPS      Recession    $            Normal    $            Expansion    $                         Calculate the percentage changes   in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be   indicated by a minus sign.)            Percentage changes in   EPS      Recession    %           Expansion %                     Calculate earnings per share   (EPS) under each of the three economic scenarios assuming the company goes   through with recapitalization. (Do not round intermediate   calculations and round your final answers to 2 decimal places. (e.g., 32.16))              EPS      Recession    $            Normal    $            Expansion    $                         Given the recapitalization,   calculate the percentage changes in EPS when the economy expands or enters a   recession. (Negative amounts should be indicated by a   minus sign. Do not round intermediate calculations and round your final   answers to 2 decimal places. (e.g., 32.16))           Percentage changes in   EPS      Recession    %           Expansion %               Q15 Rolston Corporation is comparing   two different capital structures, an all-equity plan (Plan I) and a levered   plan (Plan II). Under Plan I, Rolston would have 150,000 shares of stock   outstanding. Under Plan II, there would be 100,000 shares of stock outstanding   and $1.20 million in debt outstanding. The interest rate on the debt is 5   percent and there are no taxes.           If EBIT is $300,000, what is the   EPS for each plan? (Do not round intermediate   calculations and round your final answers to 2 decimal places. (e.g., 32.16))             EPS      Plan I    $            Plan II    $                         If EBIT is $550,000, what is the   EPS for each plan? (Do not round intermediate   calculations and round your final answers to 2 decimal places. (e.g., 32.16))             EPS      Plan I    $            Plan II    $                        What is the break-even EBIT? (Enter your answer in dollars, not millions of dollars, i.e.   1,234,567. Do not round intermediate calculations.)             Break-even   EBIT    $                   Q20 Alpha Corporation and Beta   Corporation are identical in every way except their capital structures. Alpha   Corporation, an all equity firm, has 17,000 shares of stock outstanding,   currently worth $25 per share. Beta Corporation uses leverage in its capital   structure. The market value of Beta’s debt is $67,000, and its cost of debt   is 7 percent. Each firm is expected to have earnings before interest of   $77,000 in perpetuity. Neither firm pays taxes. Assume that every investor   can borrow at 7 percent per year.            What is the value of Alpha   Corporation? (Do not round intermediate calculations.)              Value of   Alpha    $                What is the value of Beta   Corporation? (Do not round intermediate calculations.)              Value of   Beta    $                What is the market value of Beta   Corporation’s equity? (Do not round intermediate   calculations.)              Market   value of Beta’s equity    $                How much will it cost to   purchase 20 percent of each firm’s equity? (Do not round   intermediate calculations.)              Amount to invest      Alpha    $            Beta    $                        Assuming each firm meets its   earnings estimates, what will be the dollar return to each position in part   (d) over the next year? (Do not round intermediate   calculations.)              Dollar return on investment      Alpha    $            Beta    $                    The Maxwell Company is financed   entirely with equity. The company is considering a loan of $1.81 million. The   loan will be repaid in equal installments over the next two years, and it has   an interest rate of 9 percent. The company’s tax rate is 40 percent.            According to MM Proposition I   with taxes, what would be the increase in the value of the company after the   loan? (Enter your answer in dollars, not millions of   dollars, i.e. 1,234,567. Do not round intermediate calculations and round   your final answer to 2 decimal places. (e.g., 32.16))              Increase   in the value    $