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57.
Miller's Dry Goods is an all equity firm with 48,000 shares of stock outstanding at a market
price of $50 a share. The company's earnings before interest and taxes are $128,000.
Miller's has decided to add leverage to its financial operations by issuing $250,000 of debt
at 8 percent interest. The debt will be used to repurchase shares of stock. You own 400
shares of Miller's stock. You also loan out funds at 8 percent interest. How many shares of
Miller's stock must you sell to offset the leverage that Miller's is assuming? Assume you
loan out all of the funds you receive from the sale of stock. Ignore taxes.
58.
You currently own 600 shares of JKL, Inc. JKL is an all equity firm that has 75,000 shares
of stock outstanding at a market price of $40 a share. The company's earnings before
interest and taxes are $140,000. JKL has decided to issue $1 million of debt at 8 percent
interest. This debt will be used to repurchase shares of stock. How many shares of JKL
stock must you sell to unlever your position if you can loan out funds at 8 percent
interest?
59.
Naylor's is an all equity firm with 60,000 shares of stock outstanding at a market price of
$50 a share. The company has earnings before interest and taxes of $102,000. Naylor's
has decided to issue $750,000 of debt at 7.5 percent. The debt will be used to repurchase
shares of the outstanding stock. Currently, you own 500 shares of Naylor's stock. How
many shares of Naylor's stock will you continue to own if you unlever this position?
Assume you can loan out funds at 7.5 percent interest. Ignore taxes.
60.
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?
61.
The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding. The
company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock
from the estate of a deceased shareholder. What is the total value of the firm if you ignore
taxes?
62.
Stacy owns 38 percent of The Town Centre. She has decided to retire and wants to sell all
of her shares in this closely held, all equity firm. The other shareholders have agreed to
have the firm borrow $650,000 to purchase her shares of stock. What is the total market
value of The Town Centre? Ignore taxes.
63.
Winter's Toyland has a debt-equity ratio of 0.65. The pre-tax cost of debt is 8.7 percent
and the required return on assets is 16.1 percent. What is the cost of equity if you ignore
taxes?
64.
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 debt-equity
ratio based on M & M II with no taxes?
65.
The Corner Bakery has a debt-equity ratio of 0.62. The firm's required return on assets is
14.2 percent and its cost of equity is 16.1 percent. What is the pre-tax cost of debt based
on M & M Proposition II with no taxes?
66.
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?
67.
Hanover Tech is currently an all equity firm that has 320,000 shares of stock outstanding
with a market price of $19 a share. The current cost of equity is 15.4 percent and the tax
rate is 34 percent. The firm is considering adding $1.2 million of debt with a coupon rate of
8 percent to its capital structure. The debt will be sold at par value. What is the levered
value of the equity?
68.
Bright Morning Foods has expected earnings before interest and taxes of $48,600, an
unlevered cost of capital of 13.2 percent, and debt with both a book and face value of
$25,000. The debt has an 8.5 percent coupon. The tax rate is 34 percent. What is the value
of the firm?
69.
Exports Unlimited is an unlevered firm with an aftertax net income of $52,300. The
unlevered cost of capital is 14.1 percent and the tax rate is 36 percent. What is the value
of this firm?
70.
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?
71.
Down Bedding has an unlevered cost of capital of 14 percent, a cost of debt of 7.8 percent,
and a tax rate of 32 percent. What is the target debt-equity ratio if the targeted cost of
equity is 15.51 percent?
72.
Johnson Tire Distributors has debt with both a face and a market value of $12,000. This
debt has a coupon rate of 6 percent and pays interest annually. The expected earnings
before interest and taxes are $2,100, the tax rate is 30 percent, and the unlevered cost of
capital is 11.7 percent. What is the firm's cost of equity?
73.
Country Markets has an unlevered cost of capital of 12 percent, a tax rate of 38 percent,
and expected earnings before interest and taxes of $15,700. The company has $12,000 in
bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds are
selling at par value. What is the cost of equity?
74.
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?
