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Finance 6 questions




Question;6.1. Cameron Inc.;needs $60 million in new capital, which it may acquire by selling bonds at par;with coupon 10% or by selling stock at $45 (net) per share. The current capital;structure of Cameron consists of $300 million (face value) of 9% coupon bonds;selling at 90, and 10 million shares of stock selling at $48 apiece. After the;new financing, the EBIT of Cameron is expected to be $70 million with a;standard deviation of $22 million. Which method of financing do you recommend?;What is the probability that you are right?;6.2. Brown Corporation;is expecting to have EBIT next year of $14 million, with a standard;deviation of $5 million. Brown has $40 million in bonds with coupon of 10%;selling at par, which are being retired at the rate of $3 million annually.;Brown also has 100,000 shares of preferred stock, which pays annual dividend of;$5 per share. The tax rate of Brown is 40%. Calculate the probability that;Brown will not be able to pay interest, sinking fund, and preferred dividends;out of its current income, next year.;6.3. For Blair;Corporation debt-to-equity ratio, income tax rate, and dividend payout ratio;are all 35%. The cost of debt is 11%. Blair has 1.5 million shares of common;stock, and $20 million in long-term bonds, selling at par. Its dividend is $1;per share. Find the EBIT and the price per share for Blair.;6.4. Major Company has;4 million shares of common stock selling at $20 each. It also has $25 million;in bonds with coupon rate of 8%, selling at par. Major needs $14 million in new;capital, which it can raise by selling stock at $18, or bonds at 10% interest.;The expected EBIT after the new capitalization is $9 million, with a;standard deviation of $4 million. What is the preferred method of raising new;capital? What is the probability that you are right? Stock, 65.54%?;6.5. Thatcher;Corporation is an all equity firm with a total value of $30 million. It;requires an additional capital of $6 million, which may be either equity, or;debt at the interest rate of 10%. After the new capitalization, the expected;EBIT is $6 million, with standard deviation of $1.4 million. The company pays;income tax at 40% rate, and it has 1 million shares outstanding. What is the;preferred method of raising new capital, if the objective is to maximize the;EPS? What is the probability that you are right in your decision?;6.6. Callaghan Inc. has;debt-to-assets ratio of 44%, tax rate of 35%, and total value of $100 million.;William J. Callaghan, the CFO, would like to increase the leverage ratio to;46%, and he believes that there will be no change in the bankruptcy cost of the;company. How many dollars? worth of 13% coupon bonds should the company sell;and buy back its own stock, to accomplish the financial restructuring?;6.7. Wilson Company;plans to buy back 1 million shares of its own stock from its cash reserves at;$75 a share. This will increase the bankruptcy costs by $12 million, and the;debt/assets ratio from 36% to 40%. The income tax rate of the company is 30%.;Find the value of the stock per share after this buyback. Is the company making;the right move?;6.8. Churchill Company has debt/assets ratio 50%, which is too high;and it should be at 46% to be optimal. This debt reduction should also reduce;the bankruptcy costs by $25 million. At present Churchill has 7 million shares;of common stock selling at $40 each. The tax rate of Churchill is 30%. How many;shares of stock should the company sell, and buy back bonds from the proceeds;to attain its optimal capital structure?


Paper#50189 | Written in 18-Jul-2015

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