QUESTION 66

The following information applies to the next 10 problems.

The Wallace Corporation is a zero growth firm with an expected EBIT of $800,000 on a permanent basis, and corporate tax rate of 40 percent. Wallace uses no debt, and the cost of equity to an unlevered firm in the same risk class is 12.0 percent. The firm has 100,000 shares outstanding.

What is the value of the firm?

		$2,500,000
		$2,800,000
		$3,800,00
		$4,000,000
		$4,400,000

1 points

QUESTION 67

What is the EPS (earnings per share) of the firm?

		$4.0
		$4.2
		$4.4
		$4.6
		$4.8

1 points

QUESTION 68

What is the price per share of the firm's stock?

		$34
		$36
		$38
		$40
		$44

1 points

QUESTION 69

The following information applies to the next 7 problems.

Now, the Wallace Corporation decides to change its capital structure by borrowing $1.5 million at 8% interest on a permanent basis, and repurchasing some of its stocks. We still assume the same information from above. The Wallace Corporation is a zero growth firm with an expected EBIT of $800,000 on a permanent basis, and corporate tax rate of 40 percent. When Wallace used no debt, and the cost of equity to an unlevered firm in the same risk class is 12.0 percent. The firm had 100,000 shares outstanding before the repurchase.

What is the value of the firm with $1.5 million debt, according to MM with corporate taxes?

		$3,600,000
		$3,800,000
		$4,350,00
		$4,600,000
		$5,250,000

1 points

QUESTION 70

What is the value of equity?

		$2,700,000
		$3,100,000
		$3,350,000
		$3,450,000
		$3,750,000

1 points

QUESTION 71

What is the firm's cost of equity when the firm uses $1,500,000 debt?

		12.5%
		13.16%
		13.54%
		14.25%
		15.16%

1 points

QUESTION 72

What is the stock price of the firm at which shares are repurchased?

		$38
		$40.33
		$43
		$44
		$46

1 points

QUESTION 73

What is the number of shares the firm repurchases with $1,500,000?

		32,609
		34,091
		34,884
		37,190
		39,474

1 points

QUESTION 74

What is the EPS (earnings per share) of the firm, when the firm uses $1,500,000 debt?

		$5.35
		$5.53
		$5.77
		$6.05
		$6.42

1 points

QUESTION 75

What is the firm's value when both corporate and personal taxes are considered. Assume that the personal tax rates of Wallace's investors are 30 percent on debt (interest) income and 20 percent (on average) on income from stocks.

		$4,00,000
		$4,211,333
		$4,314,286
		$4,471,429
		$4,600,000