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    Calculating Price after stock split and ROE

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    Question 1.Rooney Inc. recently completed a 3-for-2 stock split. Prior to the split, its stock price was $90 per share. The firm's total market value was unchanged by the split. What was the price of the company's stock following the stock split?

    2.Firms A and B are identical except for their level of debt and the interest rates they pay on debt. Each has $2 million in assets, $400,000 of EBIT, and has a 40% tax rate. However, firm A has a debt-to-assets ratio of 50% and pays 12% interest on its debt, while Firm B has a 30% debt ratio and pays only 10% interest on its debt. What is the difference between the two firms' ROEs?

    3. The firm's target capital structure is consistent with which of the following?
    Maximum earnings per share (EPS).
    Minimum cost of debt (rd).
    Highest bond rating.
    Minimum cost of equity (rs).
    Minimum weighted average cost of capital (WACC). my answer

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    Solution Preview

    Solution:

    Question 1. Rooney Inc. recently completed a 3-for-2 stock split. Prior to the split, its stock price was $90 per share. The firm's total market value was unchanged by the split. What was the price of the company's stock following the stock split? my answer is 45.

    Price of company's stock following split = Initial Price/Split ratio
    Initial Price=$90
    Split ratio=3/2
    Price of company's stock following split = 90/(3/2)=$60

    2.
    Firms A and B ...

    Solution Summary

    There are three short problems. Solution to first problem explains the steps to calculate the price following the stock split. Solution to second problem calculates the difference in ROE's of two firms. Third one is a MCQ.

    $2.19