1. The firm has a 35 percent tax rate and has $106 million in


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1. The firm has a 35 percent tax rate and has $106 million in assets, currently financed entirely with equity. Equity is worth $8 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 on which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Pessimistic Optimistic Probability of state .36 .64 Expect EBIT in state $6.60 million $15.60 million The firm is considering switching to a 40 percent debt capital structure and has determined that they would have to pay a 12 percent yield on perpetual debt in either event. Required: What will be the break-even level of EBIT? 2. The firm normally pays an annual dividend. The last such dividend paid was $2.1, all future dividends are expect to grow at a rate of 5 percent per year, and the firm faces a required rate of return on equity of 25 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $31.0 per share that is not expected to affect any other future dividends. Required: What should the stock price be? LieutenantHackerStork4429
posted a question ยท Dec 14, 2013 at 11:19pm

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