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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

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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

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