GB550 unit6 Assignment

Question # 00001795 Posted By: neil2103 Updated on: 09/29/2013 07:23 PM Due on: 09/30/2013
Subject Finance Topic Finance Tutorials:
Question
Dot Image
GB550 unit6 Assignment

GB:550 Unit 6 Assignment

Chapter 13: Question 13-5 Pg. 548

How is it possible for an employee stock option to be valuable even if the firm’s stock price fails to meet shareholders’ expectations?

Chapter 15: Problem 15-8 Pg. 633-634

The Rivoli Company has no debt outstanding, and its financial position is given by the following data:

Assets (book=market) $3,000,000

EBIT $500,000

Cost of Equity, rs 10%

Stock Price, P0 $15

Shares Outstanding, n0 200,000

Tax Rate, T (Federal-plus-State) 40%

The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity will increase to 11% to reflect the increased risk. Bonds can be sold at a cost of 7%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.

a. What effects would this use of leverage have on the value of the firm?

b. What would be the price of Rivoli’s stock?

c. What happens to the firm’s earnings per share after the recapitalization?

d. The $500,000 EBIT given previously is actually the expected value from the following probability distribution:

Probability EBIT

0.10 ($ 100,000)

0.20 200,000

0.40 500,000

0.20 800,000

0.10 1,100,000

Determine the times-interest-earned ratio for each probability. What is the probability of not covering the interest payment at the 30 % debt level?


Dot Image
Tutorials for this Question
  1. Tutorial # 00001638 Posted By: neil2103 Posted on: 09/29/2013 07:25 PM
    Puchased By: 2
    Tutorial Preview
    The solution of GB550 unit6 Assignment...
    Attachments
    GB550_unit6_Assignment.docx (22.38 KB)

Great! We have found the solution of this question!

Whatsapp Lisa