Exercise Manajemen Keuangan 2

1. Break-even EBIT

You are considering two different capital structures. The first option consists of 20,000 shares of stock. The second option consists of 10,000 shares of stock plus $200,000 of debt with an interest rate of 8%. Ignore taxes.

What is the break-even level of EBIT between these two options?

2. M&M Proposition I, no tax

The company is considering reducing the number of shares to 300,000. To do this, the firm will have to borrow $5 million at 8% interest.

Ignoring taxes, what is the value of the firm?

3. M&M Proposition II, no tax

Walter’s Store has a debt/equity ratio of .60. The required return on assets is 12% and the pre-tax cost of debt is 8%. Ignore taxes.

What is the cost of equity?

4. M&M Proposition I with tax

The Bigely Co. has $5,000 worth of debt outstanding that is selling at par. The coupon rate is 9% and the company tax rate is 34%.

What is the amount of the annual tax shield?

What is the present value of the tax shield?

5. M&M Proposition I with tax

Dawn, Inc. has 150,000 shares of stock outstanding at a market price of $30 a share. The cost of equity is 10%. The company is considering adding $1.5 million of debt with a coupon rate of 7%. The debt will sell at par. The tax rate is 35%.

What will the value of Dawn, Inc. be after they add the debt to their capital structure?

What is the levered value of the equity?

6. M&M Proposition II with tax

Charlie & Co. has $2,500 in bonds outstanding that are selling at par. The bonds have a 7% coupon rate and pay interest annually. The expected EBIT is $1,400 and the unlevered cost of capital is 10%. The tax rate is 35%.

What is the cost of equity?

7. M&M Proposition II with tax

Using the information from the last problem, you have debt of $2,500, equity of $7,475, VL of $9,975, RD of 7%, RE of 10.65% and a tax rate of 35%.

What is the weighted average cost of capital (WACC)?