5.A consultant has collected the following information regarding Young Publishing
Total assets $3,000 million
Tax rate 40%
Operating income (EBIT) $800 million
Debt ratio 0%
Interest expense $0 million
Net income $480 million
M/B ratio 1.00 #215
Share price $32.00
EPS = DPS =$3.20
The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS). The consultant believes that if the company moves to a capital structure financed with 20 percent debt and 80 percent equity (based on market values) that the cost of equity will increase to 11 percent and that the pre-tax cost of debt will be 10 percent. If the company makes this change, what would be the total market value of the firm? (The answers are in millions.)
7. Firms A & B are similar firms in the same industry. Firm A and B have the same profit margin and total asset turnover when compared. However, Firm A's capital structure is 50% debt and Firm B's capital structure is 66% debt. Which firm, given the above conditions will experience the highest return on equity (ROE) ?
c. Can't tell from information given.© BrainMass Inc. brainmass.com June 4, 2020, 2:29 am ad1c9bdddf
5. Current market value of equity = EBIT*(1-Tax Rate)/WACC = 800*(1-40%)/10%=$4800 million
20% financed with debt, debt = 4800*20%=960 million
Operating income (EBIT) = $800 million
Interest expense = $960 million*10%=96 million
EBT = ...
Answers two multiple choice questions on equity valuation and return on equity.