Exam 8: Capital Structure

State Company had determined its earnings before interest and taxes (EBIT) in four possible states of the world. In the Great State, EBIT will be $3,000,000 and in the Good, Normal and Poor States EBIT will be $2,000,000, $1,500,000, and $1,000,000 in that order. If each state has an equal probability of occurring, then what is State Company's expected EBIT?

Which of the following statements is true?

Miller's Drugstore Miller's drugstore has an EBIT of $15,000, debt with a market value of $25,000 and a required return on assets of 12%. -Assuming a corporate tax rate of 35%, what is Miller's Drugstore's value?

Bavarian Brew Bavarian Brew, an unlevered firm, has an expected EBIT of $500,000. The required return on assets for the firm's assets is 10%. The company has 250,000 shares outstanding. The company is considering raising $1 million in debt with a required return of 6% and would use the proceeds to repurchase outstanding stock. -What is the value of Bavarian Brew after the restructuring, if the PV of bankruptcy cost is $750,000? Assume a corporate tax rate of 34%.

Miller's Drugstore Miller's drugstore has an EBIT of $15,000, debt with a market value of $25,000 and a required return on assets of 12%. -Assuming no taxes, what is Miller's Drugstore's value?

Bavarian Brew Bavarian Brew, an unlevered firm, has an expected EBIT of $500,000. The required return on assets for the firm's assets is 10%. The company has 250,000 shares outstanding. The company is considering raising $1 million in debt with a required return of 6% and would use the proceeds to repurchase outstanding stock. -What is the value of Bavarian Brew before restructuring? Assume no corporate taxes.

Bavarian Brew Bavarian Brew, an unlevered firm, has an expected EBIT of $500,000. The required return on assets for the firm's assets is 10%. The company has 250,000 shares outstanding. The company is considering raising $1 million in debt with a required return of 6% and would use the proceeds to repurchase outstanding stock. -What is the value of Bavarian Brew after restructuring. Assume no corporate taxes.

Bavarian Brew Bavarian Brew, an unlevered firm, has an expected EBIT of $500,000. The required return on assets for the firm's assets is 10%. The company has 250,000 shares outstanding. The company is considering raising $1 million in debt with a required return of 6% and would use the proceeds to repurchase outstanding stock. -What is the value of Bavarian Brew before restructuring? Assume a corporate tax rate of 34%.

Financial distress can lead to financial and operating "games." Which of the following statements is (are) true?

Bavarian Brew Bavarian Brew, an unlevered firm, has an expected EBIT of $500,000. The required return on assets for the firm's assets is 10%. The company has 250,000 shares outstanding. The company is considering raising $1 million in debt with a required return of 6% and would use the proceeds to repurchase outstanding stock. -What is the value of Bavarian Brew after restructuring? Assume corporate taxes of 34%.