Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

End of Chapter Problems Search the com The Rivoli Company has no debt outstanding, and its financial position is given by the following data: Assets

image text in transcribed
image text in transcribed
End of Chapter Problems Search the com 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, rs 10% Stock price, Po $15 Shares outstanding, no 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 40% debt based on market values, Its cost of equity, fs, will increase to 139 to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Rivoll is a no growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time. a. What effect would this use of leverage have on the value of the firm? 1. Increasing the financial leverage by adding debt results in a decrease in the firm's value II. Increasing the financial leverage by adding debt has no effect on the firm's value. III. Increasing the financial leverage by adding debt results in an increase in the firm's value. Select- $ b. What would be the price of Rivoll's stock? Do not round intermediate calculations. Round your answer to the nearest cent. per share c. What happens to the firm's earnings per share after the recapitalization? Do not round intermediate calculations, Round your answer to the rest The firm its EPS by $ cent Select- d. The $500,000 EBIT given previously is actually the expected value from the following probability distribution: Probability EBIT 0.10 ($ 110,000) 0.20 150,000 92T Sunny 7/2 O H 405 pshond-2374051166510700 & 17. End of Chapter Problems d. The $500,000 EBIT given previously is actually the expected value from the following probability distribution: Probability EBIT 0.10 ($ 110,000) 0.20 150,000 0.40 400,000 0.20 750,000 0.10 1,710,000 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 Probability TIE 0.10 0.20 0.40 0.20 0.10 What is the probability of not covering the interest payment at the 40% debt level? Do not found intermediate calculation. Hound you ever to two decimal places. % Che Weine 32F Sunny O C ** C

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Finance And Accounting For Business

Authors: Bob Ryan

1st Edition

9781861529930

More Books

Students also viewed these Accounting questions

Question

what is a peer Group? Importance?

Answered: 1 week ago

Question

What are the purposes of performance appraisals?

Answered: 1 week ago