are no taxes a. If EBIT is $500,000, which plan will result in the higher EPS7 b. If EBIT is $750,000, which plan will result in the higher EPS? c. What is the break-even EBIT? 2. In previous problem, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm? 3. ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is financed with $650,000 in stock. XYZ uses both stock and perpetual debt, its stock s worth $325,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $68.000 Ignare taxes. a. Rico owns $48,750 worth of XYZ's stock. What rate of return is he expecting? b. Show how Rico could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage. c. What is the cost of equity for ABC? What is it for XYZ? d. What is the WACC for ABC? For XYZ? What principle have you ilustrated? 4. STP Corp. uses no debt. The weighted average cost of capital is 8 percent. If the current market value of the equity is $18 million and there are no taxes, what is EBIT? 5. In the previous question, suppose the corporate tax rate is 35 percent What is EBIT in this case? What is the WACC? Explain. s 9 percent, and its cost of debt is 5.5 are no taxes a. If EBIT is $500,000, which plan will result in the higher EPS7 b. If EBIT is $750,000, which plan will result in the higher EPS? c. What is the break-even EBIT? 2. In previous problem, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm? 3. ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is financed with $650,000 in stock. XYZ uses both stock and perpetual debt, its stock s worth $325,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $68.000 Ignare taxes. a. Rico owns $48,750 worth of XYZ's stock. What rate of return is he expecting? b. Show how Rico could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage. c. What is the cost of equity for ABC? What is it for XYZ? d. What is the WACC for ABC? For XYZ? What principle have you ilustrated? 4. STP Corp. uses no debt. The weighted average cost of capital is 8 percent. If the current market value of the equity is $18 million and there are no taxes, what is EBIT? 5. In the previous question, suppose the corporate tax rate is 35 percent What is EBIT in this case? What is the WACC? Explain. s 9 percent, and its cost of debt is 5.5
