BUAD 306 Fall 2015 Professor Kenneth Ahern Practice Problems 8 Answers Posted November 23 1 What is homemade leverage and how does it make the capital structure of a firm irrelevant 2 Pewter Glass is an all equity firm that has 80 000 shares of stock outstanding The company is in the process of borrowing 600 000 at 9 percent interest to repurchase 12 000 shares of the outstanding stock What is the value of this firm if you ignore taxes 3 Jefferson Daughter has a cost of equity of 14 6 percent and a pre tax cost of debt of 7 8 percent The required return on the assets is 13 2 percent What is the firm s debtequity ratio based on M M II with no taxes 4 L A Clothing has expected earnings before interest and taxes of 48 900 an unlevered cost of capital of 14 5 percent and a tax rate of 34 percent The company also has 8 000 of debt that carries a 7 percent coupon The debt is selling at par value What is the value of this firm 5 An unlevered firm has a cost of capital of 17 5 percent and earnings before interest and taxes of 327 500 A levered firm with the same operations and assets has both a book value and a face value of debt of 650 000 with a 7 5 percent annual coupon The applicable tax rate is 38 percent What is the value of the levered firm 6 The Pizza Palace has a cost of equity of 15 3 percent and an unlevered cost of capital of 11 8 percent The company has 22 000 in debt that is selling at par value The levered value of the firm is 41 000 and the tax rate is 34 percent What is the pre tax cost of debt 7 The June Bug has a 270 000 bond issue outstanding that mature in 22 years These bonds have a 7 5 percent coupon pay interest semiannually and have a current market price equal to 98 6 percent of face value The tax rate is 39 percent What is the amount of the annual interest tax shield 8 Jemisen s has expected earnings before interest and taxes of 6 200 Its unlevered cost of capital is 14 percent and its tax rate is 34 percent The firm has debt with both a book and a face value of 2 500 This debt has a 9 percent coupon and pays interest annually What is the firm s weighted average cost of capital 9 What are the costs and benefits of paying regular cash dividends versus stock repurchases
View Full Document
Unlocking...