1. Multi-Part 15-3:

Barnes Baskets, 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.

Refer to Multi-Part 15-3. 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?

Answer

11,001; $28.85

12,711; $35.62

13,901; $42.57

15,220; $54.31

17,105; $89.67

Question 2

D. Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?

Net Income Payout

Answer

$898,750 55.63%

$943,688 58.41%

$990,872 61.34%

$1,040,415 64.40%

$1,092,436 67.62%

Question 3

Multi-Part 15-1:

Powell Plastics, Inc. (PP) currently has zero debt. Its earnings before interest and taxes (EBIT) are $80,000, and it is a zero growth company. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00.

Refer to Multi-Part 15-1. Now assume that PP is considering changing from its original capital structure to a new capital structure with 35% debt and 65% equity. This results in a weighted average cost of capital equal to 9.4% and a new value of operations of $510,638. Assume PP raises $178,723 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?

Answer

$45.90

$48.12

$51.06

$53.33

$58.75

Question 4

The following data apply to Grullon-Ikenberry Inc. (GII):

Value of operations $1,000

Short-term investments $ 100

Debt $ 300

Number of shares 100

The company plans on distributing $50 million as dividend payments. What will the intrinsic per share stock price be immediately after the distribution?

Answer

$6.32

$6.65

$7.00

$7.35

$7.72

Question 5

1.

Companies HD and LD have identical amounts of assets, operating income (EBIT), tax rates, and business risk. Company HD, however, has a much higher debt ratio than LD. Company HD's basic earning power ratio (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT?

Answer

Company HD has a higher return on assets (ROA) than Company LD.

Company HD has a higher times interest earned (TIE) ratio than Company LD.

Company HD has a higher return on equity (ROE) than Company LD, and its risk, as measured by the standard deviation of ROE, is also higher than LD's.

The two companies have the same ROE.

Company HD's ROE would be higher if it had no debt.

Question 6

1.

The following data apply to Hill's Hiking Equipment:

Value of operations $20,000

Short-term investments $ 1,000

Debt $ 6,000

Number of shares 300

The company plans on distributing $50 million by repurchasing stock. What will the intrinsic per share stock price be immediately after the repurchase?

Answer

$47.50

$50.00

$52.50

$55.13

$57.88

2 points

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