1. São Paulo Inc. needs $40 million in new capital, which it may acquire by selling bonds at par with coupon 10% or by selling stock at $37 (net) per share. The current capital structure of São Paulo consists of $250 million (face value) of 8% coupon bonds selling at 95, and 11 million shares of stock selling at $40 apiece. After the new financing, the EBIT of São Paulo is expected to be $55 million with a standard deviation of $25 million. Which method of financing do you recommend? What is the probability that you are right?
2. Goiânia Corporation is expecting to have EBIT next year of $11 million, with a standard deviation of $7 million. Goiânia has $35 million in bonds with coupon of 8%, selling at par, which are being retired at the rate of $2.5 million annually. Goiânia also has 200,000 shares of preferred stock, which pays annual dividend of $5.25 per share. The tax rate of Goiânia is 35%. Calculate the probability that Goiânia will not be able to pay interest, sinking fund, and preferred dividends, out of its current income, next year.
3. For Florianópolis Corporation debt-to-equity ratio, income tax rate, and dividend payout ratio are all 30%. The cost of debt is 11%. Florianópolis has 2 million shares of common stock, and $27 million in long-term bonds. Its dividend is $1.20 per share. Find the EBIT and the price per share for Florianópolis.
4. Belém Company has 4 million shares of common stock selling at $17 each. It also has $26 million in bonds with coupon rate of 9%, selling at par. Belém needs $10 million in new capital, which it can raise by selling stock at $15, or bonds at 10% interest. The expected EBIT after the new capitalization is $8 million, with a standard deviation of $4 million. What is the preferred method of raising new capital? What is the probability that you are right?
5. São Luís Corporation is an all equity firm with a total value of $22 million. It requires an additional capital of $7 million, which may be either equity, or debt at the interest rate of 7%. After the new capitalization, the expected EBIT is $6 million, with standard deviation of $2 million. The company pays income tax at 45% rate, and it has 2 million shares outstanding. What is the preferred method of raising new capital, if the objective is to maximize the EPS? What is the probability that you are right in your decision?
6. Recife Inc. has debt-to-assets ratio of 35%, tax rate of 40%, and total value of $200 million. William J. Recife, the CFO, would like to increase the leverage ratio to 39%, and he believes that there will be no change in the bankruptcy cost of the company. How many dollars' worth of 11% coupon bonds should the company sell, and buy back its own stock, to accomplish the financial restructuring?
7. Belo Horizonte Company plans to buy back 1.5 million shares of its own stock from its cash reserves at $65 a share. There will be no change in the debt of the company. This will increase the bankruptcy costs by $13 million, due to lower cash reserves of the company. Due to share buyback, the debt/assets ratio will go from 33% to 37%. The income tax rate of the company is 30%.
(A) Write two equations representing B/V of the company, before and after the share buyback.
(B) Solve them to find the initial and final value of the company.
(C) Calculate the number of shares of stock, before and after the buyback.
(D) Find the value of the stock per share after this buyback. Is the company making the right move?
8. Teresina Company has debt/assets ratio 60%, which is too high and it should be at 55% to be optimal. This debt reduction should also reduce the bankruptcy costs by $25 million. At present, Teresina has 6 million shares of common stock selling at $45 each. The tax rate of Teresina is 35%. How many shares of stock should the company sell, and buy back bonds from the proceeds, to attain its optimal capital structure?