7 (3) What is the firm's return on invested capital (ROIC)? $400,000 60% $2,000,000 9 EBIT 10 Tax rate 11 Total invested capital 12 13 ROICEBIT (1-T/ Total invested capital 14 ROIC 15 16 12.00% PART C Consider two hypothetical firms, Firm U, with zero debt financing, and Firm L, with $10,000 of 12% debt. Both firms have $20,000 in invested capital and a 40% federal-plus-state tax rate. 17 18 Complete the partial income statements and the firms' ratios. (1) 19 20 $20,000 40% 0% 1200 Total capital for both firms 21 Tax rate for both firms 22 Debt ratio for FirmU 23 Debt ratio for Firm L 24 Cost of debt for Firm L 25 26 27 TOTAL CAPITAL 28 EQUITY 29 30 PROBABILITY 31 SALES 32 OPER. COSTS 33 EBIT 34 INTEREST EXPENSE 35 EBT 36 TAXES (40%) 37 NET INCOME 38 39 ROI 40 ROE 41 TIE FIRM U $20,000$20,000 $20,000 $20,000 $20,000 $20,000 20,000$20,000 $20,000 $10,000 $10,000 $10,000 0.25 0.50 0.25 0.25 0.50 0.25 $6,000 $9,000 $12,000 6,000 8,000 2,000$3,000 $4,000 $6,000 $9,000$8,000 2,000 3,000 4,000 $4,000$6,000 $4,000 1,200 2,4001,200 $800 $1,800 $2,800 720 1,120 $480 $1,080 $1,680 4,000 $2,000$3,000 $4,000 800 1,200 1,600 S1,200 1,800 $2,400 320 6.0% #REFI #REFI 6.0% 4.8% 3.3 #REFI 112,0% 6.0% 9.0% 12.0% 10.8% 2.5 16.8% 3.3 14 Case model #REF! 43 E(ROIC) 44 E(ROE) 45 E(TIE) 46 47 SD(ROIC) 48 SD(ROE 49 SD(TIE) 50 #REF! 9.0% 10.8% 2.9166667x #REFI #REF! 2.1% 4.2% 0.4 x 51 PART D 52 The cost of debt at different debt levels: 54 Amount D Borrowed So $250 $500 $750 $1,000 Bond / Capital DIE Ratio 0.00000Ratin 0.12500.1429 0.2500 0.33 55 56 Ratio 0.0000 AA 58 59 60 61 18.0% 9.0% | 11.5% 140% 0.3750 0.6000 BBB .5000 100 (3) Assume that shares could be repurchased at the current market price of $25 per share. Calculate CD's expected EPS and TIE at debt levels of $0, $250,000, $500,000, $750,000, and $1,000,000. How many share would remain after recapitalization under each scenario? 64 Sales (last year) 65 Variable costs as a % of sales 66 Fixed costs 67 Total capital 68 Shares outstanding 69 Current stock price 70 BVPS 71 Tax rate $2,000,000 $25 $25 40% 6% 6% 1.0 73 RPM 74 Pu 75 WACC r The analysis for each debt level being considered (in thousands of dollars and shares) is shown below: EBIT s0 At D: $0 #DIV/0! Earnings per share Times interest earned 10,000 10,000 $3.26 20.00 Sh ares repurchased Remaining shares O Earnings per share 1 Times interest earned - At D- $500,000 Shares repurchased - 5 Remaining shares 7 Earnings per share 20,000 -20,000 $0.00 0.00 Times interest earned - 0 2 Shares repurchased 3 Remaining shares 4 Earnings per share- 5 Times interest earned 6 30,000 -30,000 $0.00 $1,000,000 9 Shares repurchased- 0 Remaining shares 40,000 40,000 $0.00 0.00 Earnings per share 2 Times interest earned 14 Case model