Save Submit ASSE Question 1 of 10 Problem 13.09 (Recapitalization) Check My Work (2 remaining) eBook Tartan Industries currently has total capital equal to $7 million, has zero debt, is in the 25% federal-plus-state tax bracket, has a net income of $1 million, and distributes 40% of its earnings as dividends. Net Income is expected to grow at a constant rate of 5% per year, 390,000 shares of stock are outstanding, and the current WACC is 13.60%. The company is considering a recapitalization where it will issue $2 million in debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization, its before-tax cost of debt will be 11% and its cost of equity o will rise to 14.5%. a. What is the stock's current price per share (before the recapitalization)? Do not round intermediate calculations. Round your answer to the nearest cent. $ b. Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization? Assume that shares are repurchased at the price calculated in part a. Do not round intermediate calculations, Round your answer to the nearest cent. $ Check My Work (2 remaining) Wingler Communications Corporation (WCC) produces premium stereo Headphones that sell for $20.60 per set, and this year's sales are expected to be 460,000 units. Variable production costs for the expected sales under present production methods are estimated at $10,500,000, and fixed production (operating) costs at present are $1,560,000. WCC has $4,800,000 of debt outstanding at an interest rate of 9%. There are 240,000 shares of common stock outstanding, and there is no preferred stock. The dividend payout ratio is 70%, and WCC is in the 25% federal-plus-state tax bracket. WCC is a small company with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation The company is considering Investing $7,200,000 in new equipment Sales would not increase, but variable costs per unit would decline by 20%. Also, fixed operating costs would increase from $1,550,000 to $1,800,000. WCC could raise the required capital by borrowing $7,200,000 at 10% or by selling 240,000 additional shares of common stock at $30 per share. a. What would be WCC's EPS (1) under the old production process, (2) under the new process if it uses debt, and (3) under the new process if it uses common stock? Do not round Intermediate calculations. Round your answers to the nearest cent. 1. $ 2. $ 3. $ A-Z b. At what unit sate level would we have the same EPS assuming it undertakes the investment and finances it with debt or with stock? (Hint: v- variable cost per unit - $8,400,000/460,000, and ePs - [(PQ-VQ-F. 1)(1 T)YN. Set EPS-stock - EPSoe and solve for Q.) Do not round intermediate calculations. Round your answer to the nearest whole number units c. At what unit sales level would EPS 0 under the three production/financing setups - that is, under the old plan, the new plan with debt financing, and the new plan with stock ninancing? (Hint: Note that Vold = $10,500,000/460,000, and use the hints for part b, setting the EPS equation equal to zero.) Do not round intermediate calculations, Round your answers to the nearest whole number Old plan: New plan with debt financing New plan with stock financing: units units NO units Ons robem Check My Work (2 remaining) O eBook A company's fixed operating costs are $650,000, its variable costs are $2.90 per unit, and the product's sales price is $5.05. What is the company's break-even point; that is, at what unit sales volume will its Income equal its costs? Round your answer to the nearest whole number units O Check My Work (2 remaining) eBook Problem Walk-Through Situational Software Co. (SSC) is trying to establish its optimal capital structure. Its current capital structure consists of 30% debt and 70% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rep, is 3%; the market risk premium, RPM, is 5%; and the firm's tax rate is 25%. Currently, SSC's cost of equity is 12%, which is determined by the CAPM. What would be SSC's estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Do not round Intermediate calcutations. Round your answer to two decimal places. % Check My Work (a remaining) B eBook o The Warren Watch Company sells watches for $27, fixed costs are $120,000, and variable costs are $14 per watch. a. What is the firm's gain or loss at sales of 7,000 watches? Loss, if any, should be indicated by a minus sign. Round your answer to the nearest cent. o $ What is the firm's gain or loss at sales of 17,000 watches? Loss, if any, should be indicated by a minus sign. Round your answer to the nearest cent. $ b. What is the break-even point (unit sales)? Round your answer to the nearest whole number units c. What would happen to the break-even point if the selling price was raised to $347 -Select- d. What would happen to the break-even point if the selling price was raised to $34 but variable costs rose to $23 a unit? Round your answer to the nearest whole number -Select- Check My Work (2 remaining) eBook Hartman Motors has $18 million in assets, which were financed with $6 million of debt and $12 million in equity. Hartman's beta is currently 1.7, and its tax rate is 20%. Use the Hamada equation to find Hartman's unlevered beta, bu. Do not round intermediate calculations. Round your answer to two decimal places. Check My Work (2 remaining) Olcon Key DO eBook a. Given the following information, calculate the expected value for Firm C's EPS. Data for Firms A and B are as follows: E(EPSA) - $5.10, and GA - $3.63; E(EPS) - $4.20, and on - $2.94. Do not round intermediate calculations, Round your answer to the nearest cent. o Probability 0.1 0.2 0.4 0.2 0.1 Firm A: EPSA ($1.69) $1.80 $5.10 $8.40 $11.89 Firm B: EPS (1.20) 1.33 4.20 7.07 9.60 Firm C: EPSC (2.56) 1.35 5.10 8.85 12.76 E(EPSC): $ b. You are given that oc - $4.11. Discuss the relative riskiness of the three firms' earnings using their respective coefficients of variation. Do not round intermediate calculations. Round your answers to two decimal places. CV B C The most risky firm is -Select- Check My Work (2 remaining) B eBook Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Debt/Capital Ratio Projected EPS Projected Stock Price 20% $3.05 $32.25 30 3.65 35.75 40 3.85 35.50 50 3.60 33.00 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? Choose from the options provided above. Round your answers to two decimal places. % debt % equity At what debt-to-capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to two decimal places. 9 Check My Work (2 remaining) eBook Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $27 million in invested capital, has $4.05 million of EBIT, and is in the 25% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 11% Interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 9% Interest on its debt. Neither firm uses preferred stock in its capital structure. a. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places. % ROIC for firm LL: ROIC for firm HL: % b. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LL: ROE for firm HL c. Observing that HL has a higher ROE, LL'S treasurer is thinking of raising the debt-to-capital ratio from 25% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer to two decimal places. % Check My Work (2 remaining) LE eBook The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $13 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 25%. The CFO has estimated next year's EBIT for three possible states of the world: $4.5 million with a 0.2 probability, $3.5 million with a 0.5 probability, and $700,000 with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round Intermediate calculations. Round your answers to two decimal places. Debt/Capital ratio is 0. ROE % 0: % CV: Debt/Capital ratio is 10%, interest rate is 9%. RE: % 0 % CV: Debt/Capital ratio is 50%, Interest rate is 11% ROE: % O: % CV: Debt Capital ratio is 60%, interest rate is 14%. ROE: % 0: % CV