1. Daddi Mac, Inc., doesn’t face any taxes and has $377.50 million in assets, currently financed entirely with equity. Equity is worth $40 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below
State
Recession
Average
Boom
Probability of state
0.25
0.55
0.20
Expected EBIT in state
$5,285,000
$11,385,000
$18,346,500
The firm is considering switching to a 20-percent-debt capital structure, and has determined that it would have to pay an 8 percent yield on perpetual debt regardless of whether it changes the capital structure. What will be the standard deviation in EPS if the firm switches to the proposed capital structure?
2. Kenzie Cos. is expected to pay a dividend of $2.55 per year indefinitely. The appropriate rate of return on this stock is 16 percent per year, and the stock consistently goes ex-dividend 40 days before dividend payment date.
a. What will be the expected minimum price in light of the dividend payment logistics?
b. What will be the expected maximum price in light of the dividend payment logistics?
(Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places.)
3. Renee’s Boutique, Inc., needs to raise $58.11 million to finance firm expansion. In discussions with its investment bank, Renee’s learns that the bankers recommend a debt issue with an offer price of $1,000 per bond and they will charge an underwriter’s spread of 4.5 percent of the gross price
a. Calculate the net proceeds to Renee’s from the sale of the debt.
b. How many bonds will Renee’s Boutique need to sell in order to receive the $58.11 million it needs?(Do not round intermediate calculations and round your final answer to the nearest whole number.)
