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##### (13-5) You are given the following forecasted in...

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(13-5) You are given the following forecasted information for the year 2014: sales = \$300,000,000, operating profitability (OP) = 6% capital requirement (CR) = 43%, growth (g) = 5% and the weight average cost of capital (WACC) = 9.8%. If these values remain constant, what is the horizon value (i.e., the 2014 value of operations)? (15-8) The Rivoli Company has no debt outstanding, and its financial position is given by the following data: Assets (book =market) \$300,000 EBIT \$500,000 Cost of equity, rs \$10% Stock price, P0 \$15 Shares outstanding, no \$200,000 Tax rate, T (federal-plus-state) 40% The firm is considering selling bonds and simultaneously repurchasing some its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equality, rs, will increase to 11% to reflect the increased risk. Bonds can be sold at cost, rd, of 7%. Rivoli is a no-growth firm. Hence, all it?s earning are paid out as dividends. Earning are expected to be constant over time. A What effect would this use of leverage have on the value of the firm? B What would be the price of Ravioli?s stock? C What is happens to the firms earning per share after the recapitalization? D The \$500,000 EBIT given previously is actually the expected value from the following probability distribution. Probability EBIT 0.10 (\$100,000) 020 200,000 0.40 500,000 0.20 800,000 010 1,100,000 Determine the times-interest earned ratio for each probability. What is the probability of not covering the interest payment at the \$30% debt level?

Paper#3889 | Written in 18-Jul-2015

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