Please do on Excel and show formulas and functions.
Currently, the firm is all equity funded with 500000 shares valued at $10 per share and the required return on equity is 15.6%. Income tax rate is 40%. Your banker has indicated that the following leverage restructurings are possible:
Debt Leverage 10.00% 20.00% 30.00%
Interest 8.50% 9.00% 9.50%
ROE 16.00% 17.00% 19.00%
1. Estimate the share prices for the following debt restructures 10%, 20%, and, 30%, respectively:
A $10.44; $10.68; $10.48
B $10.68; $10.48; $10.44
C $10.68; $10.44; $10.48
D $10.48; $10.68; $10.44
E $10.44; $10.48; $10.68
2. Estimate which two debt restructures maximize firm value.
A 0%; 10%
B 20%; 30%
C 30%; 0%
D 10%; 20%
E 0%; 20%
Airplane Company has a cost-plus-fixed fee contract with the air force to build jets. The government will buy any additional equipment that it needs on a justified cost-savings basis. The incremental tax rate for the company is 40%. The company has computed the following labor savings for a new equipment that costs $18334:
Period 1 Period 2
Before Tax $10,000 $10,000
After Tax $6,000 $6,000
3. The company has an after-tax time value of money of 6% and the federal government has a before-tax time value of money of 5%. Should the equipment be purchased?
A COMPANY-NO; GOVT-YES
B INDETERMINATE
C COMPANY-YES; GOVT-NO
D COMPANY-YES; GOVT-YES
E COMPANY-NO; GOVT-NO
4. Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by equity.
A 23.76%; $2.38
B 22%; $2.2
C 29.7%; $2.97
D 25.08%; $2.51
E 33%; $3.3
5. Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by debt.
A 22%; $2.2
B 23.76%; $2.38
C 33%; $3.3
D 29.7%; $2.97
E 25.08%; $2.51
6. Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by equity and debt equally.
A 25.08%; $2.51
B 22%; $2.2
C 29.7%; $2.97
D 33%; $3.3
E 23.76%; $2.38