If you do not plan to answer ALL OF THE QUESTIONS, DO NOT ANSWER AT ALL. Please answer ALL Questions 1-4 along with work shown! Thank you! Please hand in your homework before the end of the class 1. Evis Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9%. Evis currently has no debt, and its cost of equity is 16%. The tax rate is 35%. a) What is the value of the firm? b) If Evis borrows $135,000 of perpetual debt and uses the proceeds to repurchase shares. What is the firms value? c) What is the cost of equity after recapitalization? d) What is WACC?

2. Wells Inc., plans to announce that it will issue $2 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 6%. Wells is currently an all-equity firm worth $6.3 million with 400,000 shares of common stock outstanding. After the sale of bonds, Wells will maintain the new capital structure indefinitely. Wells currently generates annual pretax earnings of $1.5 million. This level of earnings is expected to remain constant in perpetuity. The tax rate is 40%. a) What is the expected return on Wells equity before the announcement of debt issue? b) Construct the market value balance sheet before the announcement. What is the price per share? c) Construct the market value balance sheet immediately after the announcement. d) What is the stock price immediately after the announcement? e) Construct the market value balance sheet after the restructuring. How many shares will remain after the repurchase? f) What is the cost of equity after the restructuring? What is the WACC?

3. Summer Co. currently has 330,000 shares of stock outstanding that sell for $64 per share. Assuming no market imperfections or tax effects exist, what will the share price be after: a) Summer has a five-for-three stock split? b) Summer has a 15% stock dividend? c) Summer has a four-for-seven reverse stock split?

4. Harley Co. has a current period cash flow of $1.1 million and pays no dividends. The present value of the companys future cash flows is $15 million. The company is entirely financed with equity and has 600,000 shares outstanding. Assume the dividend tax rate is zero. a) What is the share price? b) Suppose the board of directors announces its plan to pay out 50% of its current cash flows as cash dividends to its shareholders. How can Leon, who owns 1,000 shares of Harley stock, achieve a zero payout policy of his own?