Question
Bassett Fruit Farm expects its EBIT to be $421,000 a year forever. Currently, the firm has no debt. The cost of equity is 14.4 percent
Bassett Fruit Farm expects its EBIT to be $421,000 a year forever. Currently, the firm has no debt. The cost of equity is 14.4 percent and the tax rate is 25 percent. The company is in the process of issuing $1.6 million worth of bonds at par that carry an annual coupon of 5.4 percent. What is the unlevered value of the firm?
Multiple Choice
$1,981,559
$2,194,481
$2,407,403
$2,192,708
$1,605,063
A firm is considering two different capital structures. The first option is an all-equity firm with 38,000 shares of stock. The levered option is 25,800 shares of stock plus some debt. Ignoring taxes, the break-even EBIT between these two options is $52,800. How much money is the firm considering borrowing if the interest rate is 7.3 percent?
Multiple Choice
$243,271
$208,347
$220,603
$265,387
$232,213
Summer Tan, Incorporated, is an all-equity firm with a total market value of $641,000 and 42,500 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $88,200 if the economy is normal. If there is a recession, EBIT will be 15 percent lower, and if there is a boom, EBIT will be 25 percent higher. The tax rate is 22 percent. What is the EPS in a boom?
Multiple Choice
$1.15
$1.01
$1.35
$1.55
$2.02
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