Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

24) The common stock and debt of Fleming Corp. are valued at $50 million and $30 million, respectively. Investors currently require a 20 percent return

image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
24) The common stock and debt of Fleming Corp. are valued at $50 million and $30 million, respectively. Investors currently require a 20 percent return on the common stock and an 8 percent return on the debt. If Fleming Corp. borrows $20 million of debt and uses this money to return common stock, what happens to the expected return of the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes. a. Expected return =25.2% b. Expected return =18.5% c. Expected return =21.4% d. Expected return =28.0% 25) (Continuation) In the previous scenario, how much is it going to be the new cost of capital if the tax rate was 25 percent? a. Expected return = 14.25% b. Expected return = 18.32% c. Expected return = 12.53% d. Expected return = 11.45% 26) Humphreys Removers is an all equity financed firm, with 1000 outstanding stocks and market value per share =$12. Determine the spread of expected return per share between the optimistic scenario (earnings =$3,000 ) and the pessimistic scenario (earnings =$1,200 ). a. Spread =25% b. Spread =15% c. Spread =20% d. Spread =10% 27) (Continuation) Do the same computation but now assuming that the firm is financed 60 percent with debt, at a cost of 10 percent per year. a. Spread =25.3% b. Spread =14.9% c. Spread =37.5% d. Spread =42.6% 28) (Continuation) Determine the value of the stock in the most optimistic scenario assuming 60 percent debt financing. a. $12.0/0.100=$100 b. $5.7/0.475=$12 c. $9.0/0.300=$30 d. $8.0/0.533=$15

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essentials Of Investments

Authors: Zvi Bodie, Alex Kane, Alan J. Marcus

12th Edition

1260772160, 978-1260772166

More Books

Students also viewed these Finance questions

Question

What are the general types of interviews? Explain each.

Answered: 1 week ago

Question

6 How can HRM contribute to ethical management and sustainability?

Answered: 1 week ago