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Ch 15 Capital Structure Decisions
c.
6,500; $51.06
d.
6,649; $53.33
e.
6,959; $58.78
VanMannen Foundations, Inc. (VF)
VanMannen Foundations, Inc. (VF) is a zero-growth company that currently has zero debt, and it has the data shown
Ch 15 Capital Structure Decisions
below. Now the company is considering using some debt, moving to the market value capital structure indicated below.
The money raised would be used to repurchase stock. It is estimated that the increase in risk resulting from the additional
leverage would cause the required rate of return on equity to rise somewhat, as indicated below.
EBIT =
$80,000
New Debt/Value =
20%
Growth =
0%
New Equity/Value =
80%
Orig cost of equity, rs =
10.0%
No. of shares =
10,000
New cost of equity = rs =
11.0%
Price per share =
$48.00
Tax rate =
40%
Interest rate = rd =
7.0%
76. Refer to the data for VanMannen Foundations, Inc. (VF). Now assume that VF is considering changing from its
original zero debt capital structure to a new capital structure with even more debt. This results in changes in the cost of
debt and equity, and thus to a new WACC and a new value of operations. Assume VF raises the amount of new debt
indicated below and uses the funds to purchase and hold T-bills until it makes the stock repurchase. What is the stock
price per share immediately after issuing the debt but prior to the repurchase?
Debt/Value =
40%
Value of new debt =
$213,333
Equity/Value =
60%
New WACC =
9.0%
a.
$50.67
b.
$53.33
c.
$56.00
d.
$58.80
e.
$61.74
Ch 15 Capital Structure Decisions
77. Refer to the data for VanMannen Foundations, Inc. (VF). What would the stock price be if VF issued the new debt and
immediately used the proceeds to repurchase stock?
a.
$49.43
b.
$50.70
c.
$52.00
d.
$53.33
e.
$56.00
Best Bagels, Inc. (BB)
Ch 15 Capital Structure Decisions
Best Bagels, Inc. (BB) currently has zero debt. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero
growth company. BB's current cost of equity is 13%, and its tax rate is 40%. The firm has 20,000 shares of common stock
outstanding selling at a price per share of $23.08.
78. Refer to the data for Best Bagels, Inc. (BB). Now assume that BB is considering changing from its original capital
structure to a new capital structure with 45% debt and 55% equity. This results in a weighted average cost of capital equal
to 10.4% and a new value of operations of $576,923. Assume BB raises $259,615 in new debt and purchases T-bills to
hold until it makes the stock repurchase. BB then sells the T-bills and uses the proceeds to repurchase stock. How many
shares remain after the repurchase, and what is the stock price per share immediately after the repurchase?
a.
11,001; $28.85
b.
12,711; $35.62
c.
13,901; $42.57
d.
15,220; $54.31
e.
17,105; $89.67
Ch 15 Capital Structure Decisions
79. Refer to the data for Best Bagels, Inc. (BB). Now assume that BB is considering changing from its original capital
structure to a new capital structure with 45% debt and 55% equity. This results in a weighted average cost of capital equal
to 10.4% and a new value of operations of $576,923. Assume BB raises $259,615 in new debt and purchases T-bills to
hold until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to
the repurchase?
a.
$14.42
b.
$19.36
c.
$23.91
d.
$28.85
e.
$35.62
Ch 15 Capital Structure Decisions
Anson Jackson Court Company (AJC)
The Anson Jackson Court Company (AJC) currently has $200,000 market value (and book value) of perpetual debt
outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero
growth company. AJC's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common
stock outstanding selling at a price per share of $60.00.
80. Refer to the data for the Anson Jackson Court Company (AJC). Now assume that AJC is considering changing from
its original capital structure to a new capital structure that results in a stock price of $64 per share. The resulting capital
structure would have a $336,000 total market value of equity and a $504,000 market value of debt. How many shares
would AJC repurchase in the recapitalization?
a.
4,250
b.
4,500
c.
4,750
d.
5,000
e.
5,250
Ch 15 Capital Structure Decisions
81. Refer to the data for the Anson Jackson Court Company (AJC). Now assume that AJC is considering changing from
its original capital structure to a new capital structure with 50% debt and 50% equity. If it makes this change, its resulting
market value would be $820,000. What would be its new stock price per share?
a.
$58
b.
$59
c.
$60
d.
$61
e.
$62
82. Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as
measured by its beta coefficient.
a.
True
b.
False
Ch 15 Capital Structure Decisions
83. When a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price
equal to the face value of the debt.
a.
True
b.
False
84. When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price
equal to the face value of the equity.
a.
True
b.
False
Ch 15 Capital Structure Decisions
Wilson Dover Inc.
The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is
$200 million. The volatility (σ) of Wilson Dover's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) =
0.9720 and N(d2) = 0.9050.
85. Refer to the data for Wilson Dover Inc. What is the value (in millions) of Wilson Dover's equity if it is viewed as an
option?
a.
$228.77
b.
$254.19
c.
$282.43
d.
$313.81
e.
$345.19
Ch 15 Capital Structure Decisions
86. Refer to the data for Wilson Dover Inc. What is the value (in millions) of Wilson Dover's debt if its equity is viewed
as an option?
a.
$167.57
b.
$186.19
c.
$204.81
d.
$225.29
e.
$247.82
Ch 15 Capital Structure Decisions
87. Refer to the data for Wilson Dover Inc. What is the yield on Wilson Dover's debt?
a.
6.04%
b.
6.36%
c.
6.70%
d.
7.05%
e.
7.42%
