41. Dong-A Corp. is trying to decide how best to finance a proposed $20 million capital investment. Under Plan I, the project will be financed entirely with long-term 10% annual coupon bonds. The firm currently has no debt or preferred stock. Under Plan II, common stock will be sold to net the firm $20 a share. Presently, the firm has 5 million shares are outstanding. The corporate tax rate for Roberts is 35%. Calculate the indifference level of EBIT & EPS associated with the two financing plans.

42. Threes Company is currently an all-equity firm and its market value is $500 million with 10 million shares outstanding. Jack Tripper, V.P. of Finance, is considering restructuring its capital structure. He is considering issuing $100 million debt ($1,000 par per bond) with 20-year bonds and using the proceeds to purchase common stock. Threes' cost of debt is 8% a year and its tax rate is 40%. Use annual discounting.

A.Compute the PVTS if Mr. Tripper issues 20-year zero-coupon bonds.

BCompute the PVTS, if Mr. Tripper issues 20-year 20% annual coupon bonds.

43. How would Modigliani and Miller (MM) respond to the following statements?

"Dividends are the shareholder's wages. Therefore, if a government adopts a minimum wage policy, it should establish a minimum dividend policy too."

-President of the USA (United Shareholders Alliance) -

Use the back of this page, if necessary.

44. From what we know about the capital structure policy, it is clear that we do not have a unique formula that can establish an optimal leverage ratio for all companies. However, there is evidence that firms behave as if they had target leverage ratios.Identify at least four important factors and discuss each factor in the final determination of capital structure.