Use the following information for questions$26-28.$ Ross Westerfield Corporation is an

all equity corporation with $20,000$ shares outstanding at a market price of $$70$ and

they are expecting perpetual EBIT of $$160,000.$ RW has a $100\%$ dividend payout

ratio. They are considering borrowing money at $10\%$ to raise their debt to equity ratio

to $2.$ Coach Buzzcut owns $300$ shares of RW$.$ There are no taxes

$26.$ Show Buzzcuts cash flows under the current capital structure

a$.$ $$2,000$

b$.$ $$2,200$

c$.$ $$2,400$

d$.$ $$2,600$

e$.$ $$2,800$

$27.$ Show Buzzcuts cash flow under the proposed capital structure.

a$.$ $$2,400$b$.$ $$2,600$

$9$

c$.$ $$2,800$

d$.$ $$3,000$

e$.$ $$3,200$

$28.$ If RW stuck with the original capital structure, show how Buzzcut could replicate the

proposed capital structure.

a$.$ Sell $200$ shares and lend at $10\%$

b$.$ Borrow enough money at $10\%$ to buy $200$ more shares

c$.$ Sell $600$ shares and lend at $10\%$

d$.$ Borrow enough money at $10\%$ to buy $600$ more shares

e$.$ None of the above

$29.$ Gribble Bug Exterminators are financed by pure equity and expect EBIT to be

$$22,000$ perpetually, and have a cost of equity of $13\%,$ with a tax rate of $35\%.$

Assume that M&M Proposition $1$ & $2$ hold and there are no bankruptcy costs. What is

the value of the firm under the optimal capital structure?

a$.$ $$120,500$

b$.$$$129,250$

c$.$ $$132,750$

d$.$ $$139,750$

e$.$ $$148,500$

$30.$ Burns Nuclear Plant is facing bankruptcy and can be liquidated for $$40$ million. If

Burns can restructure and sell off any unprofitable divisions they can manage to

reduce the riskiness of future cash flows and bring their WACC to $11\mathrm{.}5\%.$ Burns has

a tax rate of $33\%.$ What would the minimum perpetual pre$-$tax operating cash flows

have to be for restructuring to be viable?

a$.$ $$4,600,000\mathrm{.}00$

b$.$ $$5,665,384\mathrm{.}22$

c$.$ $$6,865,671\mathrm{.}64$

d$.$ $$7,332,107\mathrm{.}54$

e$.$$$7,869,475\mathrm{.}31$