Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

problem 1: Valuing Callable Bonds

Bowdeen Manufacturing intends to issue callable, perpetual bonds with annual coupon payments. The bonds are callable at $1,350. One-year interest rates are 12 percent. There is a 40 percent probability that long-term interest rates one year from today will be 17 percent, and a 60 percent probability that they will be 7 percent. Assume that if interest rates fall the bonds will be called.

Required:

What coupon rate should the bonds have in order to sell at par value?

problem 2: Interest on Zeroes

Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 8 percent. Assume semiannual compounding.

Required:

a) What will these bonds sell for at issuance?

b) Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year?

c) Repeat part (b) using the straight-line method for the interest deduction.

d) Based on your answers in (b) and (c), which interest deduction method would Tesla Corporation prefer?

problem 3: Firm Value

Old School Corporation expects an EBIT of $9,000 every year forever. Old School currently has no debt, and its cost of equity is 18 percent. The firm can borrow at 11 percent. The corporate tax rate is 35 percent.

Required:

a) What is the value of the firm?

b) What will the value be if Old School converts to 50 percent debt and 100 percent debt?

problem 4: Break-Even EBIT

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 162,000 shares of stock outstanding. Under Plan II, there would be 108,000 shares of stock outstanding and $1.62 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

Required:

A) If EBIT is $292,000, find out the EPS for each plan.

B) If EBIT is $1,264,000, find out the EPS for each plan.

C) find out the break-even EBIT?

problem 5: Agency Costs

Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the company’s profits are driven by the amount of work Tom does. If he works 40 hours each week, the company’s EBIT will be $405,000 per year; if he works a 50-hour week, the company’s EBIT will be $505,000 per year. The company is currently worth $2.7 million. The company needs a cash infusion of $1.32 million, and it can issue equity or issue debt with an interest rate of 9.5 percent. Assume there are no corporate taxes.

Required:

A) What are the cash flows to Tom under each scenario?

B) Under which form of financing is Tom likely to work harder?

  • Debit issue
  • Equity issue

problem 6: Costs of Financial Distress

Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year. The companies' economists agree that the probability of the continuation of the current expansion is 75 percent for the next year, and the probability of a recession is 25 percent. If the expansion continues, each firm will generate earnings before interest and taxes (EBIT) of $2.42 million. If a recession occurs, each firm will generate earnings before interest and taxes (EBIT) of $913,000. Steinberg's debt obligation requires the firm to pay $813,000 at the end of the year. Dietrich's debt obligation requires the firm to pay $1.15 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 11 percent.

Required:

A) What is the value today of Steinberg's debt and equity? What about that for Dietrich's?

B) Steinberg's CEO recently stated that Steinberg's value should be higher than Dietrich's because the firm has less debt and therefore less bankruptcy risk. Do you agree or disagree with this statement?

  • Agree
  • Disagree

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91454

Have any Question? 


Related Questions in Basic Finance

Nicollette nbspjoined towson university basketball team

Nicollette  joined Towson University basketball team since summer 2015. On average, she is able to score 30% of the field goals. Assume she tries 15 field goals in a game. (a) Let X be the number of field goals that Mimi ...

1 describe integrative management be specific concerning

1. Describe "integrative management." Be specific concerning the relationship between functionality and process. 2. In terms of enterprise extension, describe the importance of the information sharing and process special ...

If a firm were contemplating increasing the cash discount

If a firm were contemplating increasing the cash discount it offers its credit customers for early payment, what key variables would need to be considered when quantitatively analyzing this decision? How do the variables ...

1 what is the difference between descriptive and

1. What is the difference between descriptive and inferential statistics? 2. Describe the most common descriptive statistics. 3. What are standard scores, and how are they calculated? 4. What is meant by an unbiased esti ...

1 why are psychologists sometimes interested in

1. Why are psychologists sometimes interested in epidemiology? 2. Why do researchers use probability rather than nonprobability samples when doing descriptive research?

Create predictions about the relationships between

Create predictions about the relationships between behavioral variables that interest you. For each relationship that you develop, indicate how the prediction could be tested using a descriptive, a correlational, and/or ...

1 how can strategic procurement contribute to the quality

1. How can strategic procurement contribute to the quality of products produced by a manufacturing organization? 2. Explain the rationale underlying volume consolidation. What are the risks associated with using a single ...

A swap dealer quotes that the rate on a plain vanilla swap

A swap dealer quotes that the rate on a plain vanilla swap, for it to pay fixed, is the five-year Treasury rate plus 10. To receive fixed, the dealer quotes the rate as the five-year Treasury rate plus 15. Assuming the f ...

Do the assigned questions using malimash incs 2014

Do the assigned questions using Malimash, Inc.'s 2014 financial data below: Malimash, Inc. 2014 Financial Data ($ millions) Income Statement Data Sales Revenue  $7,120.00 Depreciation  $230.00 Interest Expense  $10.00 Pr ...

The following excerpts are taken from dividend policy

The following excerpts are taken from "Dividend Policy Determinants: An Investigation of the Influences of Stakeholder Theory" by Mark E. Holder, Frederick W. Langrehr, and J. Lawrence Hexter, published in the Autumn 199 ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen