When agency and bankruptcy costs are considered, the optimal capital structure has a debt level where A) bankruptcy costs are maximized. B) the debt/equity ratio is 2:1. C) the cost of equity equals zero. D) the cost of debt equals the cost of equity. E) the sum of agency and bankruptcy costs equal the benefits […]
Date: September 19th, 2020
Pensacola Soda Inc is all equity financed and generates perpetual annual EBIT of $300. Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year. Assume that Pensacola has a 100% payout rate, 1,500 shares outstanding, and that shareholders require a return […]
Date: September 19th, 2020
CN Railways is North America’s fifth largest railway. Use the equation approach and CN’s financial information for Year 10 to calculate additional funds needed (AFN) in Year 11. Selected Financial Statement Values and Ratios CN Railway Company As of December 31, Year 10 ($ millions) Total Assets $18,924 Fixed Assets 16,898 Assets that Change with […]
Date: September 19th, 2020
When Modigliani and Miller revised their original model to include taxes, they concluded that A) firms should reduce their degree of financial leverage. B) tax avoidance does not alter a firm’s value. C) tax increases lower a firm’s value. D) firms should use only debt in their capital structure. E) taxes also have no bearing […]
Date: September 19th, 2020
The Pollos Chicken Company farms chickens for sale to grocery retailers. Pollos is all equity financed and its shareholders require a return of 7%. Gus Poultry Inc farms chickens for sale to fast food restaurants. Gus Poultry has 20% debt in its capital structure (debt-to-equity is 0.25), and its cost of debt is 4%. What […]
Date: September 19th, 2020
Slurp Cola Inc is all equity financed and generates perpetual annual EBIT of $600. Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year. Assume that Slurp has a 100% payout rate, 1,000 shares outstanding, and that shareholders require a return […]
Date: September 19th, 2020
Cyberdyne Systems is a military/defense products company. Cyberdyne Systems is all equity financed. Cyberdyne has 200 million shares outstanding which trade for $20 per share. Cyberdyne’s shareholders require a return of 10%. Omni Defense Products Inc is also a military/defense products company. It’s shares are trading for $35 per share. Omni has 100 million shares […]
Date: September 19th, 2020
Which of the following statements about risk is false? A) Risk is one of the determinants of the required return. B) Risk requires the possibility of at least one outcome less favorable than the expected value. C) Risk requires the possibility of more than one outcome. D) High risk should require low return. […]
Date: September 19th, 2020
As a foreign exchange trade at Deutsche Bank, one of your customers would like a yen quote on Australian dollars. The current spot market rates are ¥101.37-85/U.S.$ and A$1.2924-44/U.S.$. What bid and ask yen cross rates would you quote on spot Australian dollars? What will be an ideal response? ANSWER Answer: By means […]
Date: September 19th, 2020
Orange Inc, a cell-phone manufacturer, is an all equity firm. At the end of the current year, the CFO expects EBIT to be $100 and the same earnings are expected annually in perpetuity. The company is not growing so CAPEX and investments in net working capital are zero. The cost of equity for Orange is […]
Date: September 19th, 2020
