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ACCT 250 Lecture Notes - Lecture 2: Tax Rate, Dividend Yield, Capital Structure

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silverwhale409
16 Oct 2018
School
Athabasca University
Department
Accounting
Course
ACCT 250
Professor
Peter

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Document Summary

The marquiz inc. , has an outstanding bond issue of 100,000 bonds with a par value of ,000 each, coupon rate of 11% with semi-annual coupon payments, and 7 years to maturity. Abc corp. has a debt-equity ratio of 2. Newly issued bonds by the company must have a yield to maturity of. 8%, whilst newly issued equity will yield 18%. With newly issued debt and equity, the investment dealer"s spreads will be 5% and 8%, respectively. A firm can consider its capital restructuring decisions in isolation from its investment decisions because company"s assets are not directly affected by capital restructuring decisions. Choose the capital structure that will maximize the value of the firm"s shares. Calculate the degree of financial leverage for abc co. , which has an ebit of ,000,000 and interest expense of ,000. The m&m proposition ii without taxes states that a firm"s cost of equity is a positive linear function of its capital structure.

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Related Questions

Consider the following information for Evenflow Power Co.,

Debt: 4,500 7.5percent coupon bonds outstanding, $1,000 par value, 21 years tomaturity, selling for 105 percent of par; the bonds make semiannualpayments.
Common stock: 99,000 sharesoutstanding, selling for $60 per share; the beta is 1.07.
Preferred stock: 13,000 shares of7 percent preferred stock outstanding, currently selling for $107per share.
Market: 9 percent marketrisk premium and 6.5 percent risk-free rate.

Assume thecompany's tax rate is 34 percent.

Required:


Find the WACC

The information below pertains to Larkspur Company for 2018.

Net income for the year $1,190,000
7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into
30 shares of common stock		 1,970,000
6% convertible, cumulative preferred stock, $100 par value; each share is convertible
into 3 shares of common stock		 4,000,000
Common stock, $10 par value 6,280,000
Tax rate for 2018 40%
Average market price of common stock $25 per share


There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 68,800 shares of common stock at $20 per share.

(a) Compute basic earnings per share for 2018.

(b) Compute diluted earnings per share for 2018

Raphael Corporation’s common stock is currently selling on astock exchange at $154 per share, and its current balance sheetshows the following stockholders’ equity section: Preferredstock—5% cumulative, $___ par value, 1,000 shares authorized,issued, and outstanding $ 50,000

Common stock—$___ par value, 4,000 shares authorized, issued,and outstanding 80,000

Retained earnings 300,000

Total stockholders' equity $ 430,000

What is the current market value (price) of this corporation’scommon stock?

What are the par values of the corporation's preferred stock andits common stock?

If no dividends are in arrears, what are the book values pershare of the preferred stock and the common stock?

If two years' preferred dividends are in arrears, what are thebook values per share of the preferred stock and the commonstock?

If two years’ preferred dividends are in arrears and thepreferred stock is callable at $60 per share, what are the bookvalues per share of the preferred stock and the common stock?

If two years’ preferred dividends are in arrears and the boardof directors declares cash dividends of $19,500, what total amountwill be paid to the preferred and to the common shareholders?