Problem Set III - Capital Structure, Financing, and Financial Distress

Problem Set III - Capital Structure, Financing, and Financial Distress

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Problem Set III Capital Structure, Financing, and Financial Distress This assignment is for practice only. It will not be graded and does not have to be turned in. 1. ( Impact of Leverage on EPS ) Health and Wealth Co. is financed entirely by common stock, which is priced to offer a 15% expected return. The common stock price is $40/share. The earnings per share is expected to be $6. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is its expected earnings per share after refinancing? (Ignore taxes) 2. ( WACC ) XYZ Corp’s. planned reduction in its scale of operations will decrease annual revenues by $1.5 million and annual costs by $1 million over the next 20 years. This scaling- down will allow the firm to sell a portion of its plant and equipment (book value: $4 million) for $5 million. This portion of plant and equipment is currently being depreciated on a straight-line basis over the next 20 years. The company, by repurchasing debt and equity, wants to maintain a 2/3 (market value) debt-to-equity ratio after the scale reduction. The company’s bond (20 years remaining to maturity) has an 8% yield to maturity. XYZ’s equity
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Problem Set III - Capital Structure, Financing, and Financial Distress

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