quizsample.ch13ch14ch15 - University of Houston Bauer...

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University of Houston Bauer College of Business Finance 3332 Principles of Financial Management Practice Quiz Ch 12 and 13 Unleveraged Firm Leveraged Firm Equity in capital structure $2,000,000 $1,000,000 Cost of equity k  e 10% 14% Debt in capital  structure -- $1,000,000 Pretax cost of debt k  d -- 6% Net operating income (EBIT) $200,000 $200,000 1. Determine the market value of the Unleveraged firm. 2. Determine the market value of the Leveraged firm. 3. What is the value of the tax shield to the Leveraged firm? Use the following information for questions 4 and 5. Ross Industries is planning an expansion costing $300,000. It can finance with new equity sold to net $10 per share, or  with the sale of bonds with a 10% coupon. The firm’s marginal tax rate is 40%. Ross currently has the following  simplified balance sheet. Liabilities and Capital Bonds (10% coupon) $200,000 Common Stock at $2 par           50,000 shares outstanding 100,000 Additional Paid in Capital 200,000 Retained Earnings 100,000   Total Liabilities and Capital $600,000 4. What is the EBIT-EPS indifference point of the two financing plans? 5. After the expansion, the firm’s EBIT is expected to be $100,000 with a standard deviation of $50,000.  If the debt  alternative is chosen, what is the probability that the company will have negative earnings per share?
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Use the following information for questions 6 and 7. Alaska Air, whose stock is selling for $27 per share, has the following stockholder equity account.
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This note was uploaded on 02/13/2011 for the course FINA 3332 taught by Professor Darlachisholm during the Spring '08 term at University of Houston.

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quizsample.ch13ch14ch15 - University of Houston Bauer...

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