eBook Capital Structure Analysis The Rivoli Company has no debt outstanding, and its financial position is given by the following data Assets (Market value book value) $3,000,000 EBIT $500,000 Cost of equity, r s 10 Stock price, P o $15 Shares outstanding, n o 200,000 Tax rate, T (federal plus state) 40 The firm is considering selling bonds and simultaneously repurchasing some of its stock If it moves to a capital structure with 35 debt based on market values, its cost of equity, r s , will increase to 11 to reflect the increased risk Bonds can be sold at a cost, r d , of 6 Rivoli is a no growth firm Hence, all its earnings are paid out as dividends Earnings are expected to be constant over time What effect would this use of leverage have on the value of the firm I Increasing the financial leverage by adding debt has no effect on the firm's value II Increasing the financial leverage by adding debt results in an increase in the firm's value III Increasing the financial leverage by adding debt results in a decrease in the firm's value What would be the price of Rivoli's stock Do not round intermediate calculations Round your answer to the nearest cent $ per share What happens to the firm's earnings per share after the recapitalization Do not round intermediate calculations Round your answer to the nearest cent The firm will increase or decrease its EPS by $ The $500,000 EBIT given previously is actually the expected value from the following probability distribution Probability EBIT 0 10 ($ 120,000) 0 20 200,000 0 40 450,000 0 20 800,000 0 10 1,320,000 Determine the times interest earned ratio for each probability Use a minus sign to enter negative values, if any Do not round intermediate calculations Round your answers to two decimal places e Determine the times interest earned ratio for each probability Use a minus sign to enter negative values, if any Do not round intermediate calculations Round your answers to two decimal places Probability TIE 0 10 0 20 0 40 0 20 0 10 What is the probability of not covering the interest payment at the 35 debt level Do not round intermediate calculations Round your answer to two decimal places

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eBook Capital Structure Analysis The Rivoli Company has no debt outstanding, and its financial position is given by the following data: Assets (Market value =

eBook

Capital Structure Analysis

The Rivoli Company has no debt outstanding, and its financial position is given by the following data:

Assets (Market value = book value)	$3,000,000
EBIT	$500,000
Cost of equity, r_s	10%
Stock price, P_o	$15
Shares outstanding, n_o	200,000
Tax rate, T (federal-plus-state)	40%

The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 35% debt based on market values, its cost of equity, r_s, will increase to 11% to reflect the increased risk. Bonds can be sold at a cost, r_d, of 6%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.

What effect would this use of leverage have on the value of the firm? I. Increasing the financial leverage by adding debt has no effect on the firm's value. II. Increasing the financial leverage by adding debt results in an increase in the firm's value. III. Increasing the financial leverage by adding debt results in a decrease in the firm's value.
What would be the price of Rivoli's stock? Do not round intermediate calculations. Round your answer to the nearest cent. $ per share
What happens to the firm's earnings per share after the recapitalization? Do not round intermediate calculations. Round your answer to the nearest cent. The firm will: increase or decrease its EPS by $?
The $500,000 EBIT given previously is actually the expected value from the following probability distribution:

Probability EBIT

0.10 ($ 120,000)

0.20 200,000

0.40 450,000

0.20 800,000

0.10 1,320,000

Determine the times-interest-earned ratio for each probability. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to two decimal places.

e. Determine the times-interest-earned ratio for each probability. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to two decimal places.

Probability	TIE
0.10
0.20
0.40
0.20
0.10

What is the probability of not covering the interest payment at the 35% debt level? Do not round intermediate calculations. Round your answer to two decimal places.