a 738 800008 b 738 813008 c 750 813008 d 750 790008 e 780 790008 155 Stock

A 738 800008 b 738 813008 c 750 813008 d 750 790008 e

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a. 7.38%; $800,008 b. 7.38%; $813,008 c. 7.50%; $813,008 d. 7.50%; $790,008 e. 7.80%; $790,008 (15.5) Stock price in a recapitalization Answer: e Diff: T 32 . Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50 percent debt and 50 percent 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 (15.5) Number of shares repurchased in a recapitalization Answer: c Diff: T 33 . 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 $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 Chapter 15: Capital Structure Decisions: Part I Page 9
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CHAPTER 15 ANSWERS AND SOLUTIONS Page 10 Chapter 15: Capital Structure Decisions: Part I
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Chapter 15: Capital Structure Decisions: Part I Page 11
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1 . (15.1) Bankruptcy costs Answer: a Diff: E 2. (15.2) Business risk Answer: b Diff: E 3. (15.2) Financial risk Answer: a Diff: E 4. (15.2) Financial risk Answer: a Diff: E 5. (15.2) Financial risk Answer: b Diff: E 6. (15.2) Financial leverage Answer: a Diff: E 7. (15.2) Use of debt financing Answer: a Diff: E 8. (15.2) Use of financial leverage Answer: b Diff: E 9. (15.2) Financial leverage Answer: b Diff: E 10. (15.2) Operating and financial leverage Answer: b Diff: E 11. (15.3) Trade-off theory Answer: a Diff: E 12. (15.2) Business risk Answer: b Diff: M 13. (15.2) Operating and financial leverage Answer: a Diff: M 14. (15.3) Bankruptcy costs Answer: a Diff: M 15. (15.2) Capital structure, ROA, and ROE Answer: d Diff: E Statements a and b are correct; therefore, statement d is the appropriate choice. ROA = NI/TA. If total assets remain the same, but NI decreases (because of the new interest payment), ROA will decrease. NI will fall, but not as much in comparison to the amount that common equity will fall, thus ROE = NI/CE will rise. BEP will remain the same. BEP = EBIT/TA, where TA and EBIT remain the same. 16. (15.5) Capital structure and WACC Answer: e Diff: E Statement a is false; if you are to the left of the firm's optimal capital structure on the WACC curve, raising a company's debt ratio will actually decrease the firm's WACC. Statement b is false; if you are to the right of the firm's optimal capital structure on the WACC curve, raising a com- pany's debt ratio will actually increase the firm's WACC. Statement c is false; as you increase the firm's debt ratio the cost of debt will in- crease because you're using more debt. Because you're using more debt the cost of equity increases because the firm's financial risk has increased. From statements a and b you can see that whether the WACC is increased de- pends on where you are on the WACC curve relative to the firm's optimal capital structure. Therefore, the correct answer is statement e.
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