35 Q for my fianl test

Skillet Industries has a debt–equity ratio of 1.7. Its WACC is 9.2 percent, and its cost of debt is 6.2 percent. The corporate tax rate is 35 percent.

a.

What is the company’s cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16))

  Cost of equity capital

%  

b.

What is the company’s unlevered cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16))

  Unlevered cost of equity capital

%  

c-1

What would the cost of equity be if the debt–equity ratio were 2? (Round your answer to 2 decimal places. (e.g., 32.16))

  Cost of equity

%  

c-2

What would the cost of equity be if the debt–equity ratio were 1.0? (Round your answer to 2 decimal places. (e.g., 32.16))

  Cost of equity

%  

c-3

What would the cost of equity be if the debt–equity ratio were zero? (Round your answer to 2 decimal places. (e.g., 32.16))

  Cost of equity

%  

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

Year

Cash Flow

0

–$

28,600

1

12,600

2

15,600

3

11,600

If the required return is 14 percent, what is the IRR for this project? (Round your answer to 2 decimal places. (e.g., 32.16))

  IRR

% 

Should the firm accept the following project?

Pendergast, Inc., has no debt outstanding and a total market value of $117,000. Earnings before interest and taxes, EBIT, are projected to be $8,300 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 23 percent higher. If there is a recession, then EBIT will be 32 percent lower. Pendergast is considering a $41,700 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 3,900 shares outstanding. Ignore taxes for this problem.

Requirement 1:

(a)

Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

EPS

  Recession

$  

  Normal

$  

  Expansion

$  

(b)

Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

%ΔEPS

  Recession

%  

  Expansion

%  

Requirement 2:

Assume Pendergast goes through with recapitalization.

(a)

Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

EPS

  Recession

$  

  Normal

$  

  Expansion

$  

(b)

Calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

%ΔEPS

  Recession

%  

  Expansion

%  

A proposed new investment has projected sales of $680,000. Variable costs are 65 percent of sales, and fixed costs are $157,000; depreciation is $58,000. Prepare a pro forma income statement assuming a tax rate of 34 percent. What is the projected net income? (Input all amounts as positive values.)

  Sales

$  

  Variable costs

  Fixed costs

  Depreciation

  EBT

$  

  Taxes

  Net income

$  

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:

Year

Cash Flow

0

–$

27,100

1

11,100

2

14,100

3

10,100

What is the NPV for the project if the required return is 12 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  NPV

$  

At a required return of 12 percent, should the firm accept this project?

What is the NPV for the project if the required return is 24 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  NPV

$  

At a required return of 24 percent, should the firm accept this project?

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 40 percent.

  Debt:

10,000 7.1 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 107 percent of par; the bonds make semiannual payments.

  Common stock:

430,000 shares outstanding, selling for $61 per share; the beta is 1.04.

  Preferred stock:

21,000 shares of 5 percent preferred stock outstanding, currently selling for $81 per share.

  Market:

10 percent market risk premium and 5.10 percent risk-free rate.

What is the company's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  WACC

 %  

Red Rocks Corporation (RRC) currently has 520,000 shares of stock outstanding that sell for $50 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:

a.

RRC has a four-for-three stock split? (Round your answer to 2 decimal places. (e.g., 32.16))

  New share price

$  

b.

RRC has a 20 percent stock dividend? (Round your answer to 2 decimal places. (e.g., 32.16))

  New share price

$  

c.

RRC has a 45.5 percent stock dividend? (Round your answer to 2 decimal places. (e.g., 32.16))

  New share price

$  

d.

RRC has a three-for-seven reverse stock split? (Round your answer to 2 decimal places. (e.g., 32.16))

  New share price

$  

Determine the new number of shares outstanding in parts (a) through (d).

a.

New shares outstanding

b.

New shares outstanding

c.

New shares outstanding

d.

New shares outstanding

The balance sheet for Chevelle Corp. is shown here in market value terms. There are 8,000 shares of stock outstanding.

Market Value Balance Sheet

  Cash

$

44,000  

  Equity

$

384,000  

  Fixed assets

340,000  

     Total

$

384,000  

     Total

$

384,000  

The company has declared a dividend of $1.70 per share. The stock goes ex dividend tomorrow.

Ignoring any tax effects, what is the stock selling for today? (Round your answer to 2 decimal places. (e.g., 32.16))

  Stock selling price

$ per share  

Ignoring any tax effects, what will it sell for tomorrow? (Round your answer to 2 decimal places. (e.g., 32.16))

  Stock selling price

$ per share  

Ignoring any tax effects, what will the balance sheet look like after the dividends are paid?

Balance Sheet

  Cash

$

  Equity

$

  Fixed assets

     Total

$

     Total

$

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,060,000 in annual sales, with costs of $755,000. If the tax rate is 35 percent, what is the OCF for this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

  OCF

$