Eagle Construction Co. is a successful privately-held firm owned by Marquettealumni.. It has $200 million bonds outstanding due in ten years with a 5% coupon paidsemi-annually. They are valued at 90% of par value.• The company also has 25 million shares of common stock outstanding amongthe partners. The stock book value is $2/share and is valued at $10/share.• A survey of publicly-held firms in their industry estimates a beta of 1.3.• The risk-free rate is 4% and the market equity return is 13%.o Analysts suggest an additional 3% premium due to their small size.• Eagle's tax rate is 20%.Step One:• Calculate the (pre-tax) yield-to-maturity of the bonds• Calculate the (after-tax) yield-to-maturity of the bondsStep Two:• Calculate the equity costStep Three:• Calculate the debt and equity mix (%)Step Four:• Calculate the WACCDebtEquity

Pre tax and After tax cost of debt: The (pre tax) yield-to-maturity of the bonds is 6.37% The…

Answered: Eagle Construction Co. is a successful…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are considering a stock investment in one of two firms (NoEquity, Inc., and NoDebt, Inc.), both of which operate in the same industry and have identical EBITDA of $38.5 million and operating income of $24.5 million. NoEquity, Inc., finances its $70 million in assets with $69 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc., finances its $70 million in assets with no debt and $70 million in equity. Both firms pay a tax rate of 21 percent on their taxable income. Calculate the net income and return on assets-funders' investments-for the two firms. (Enter your dollar answers in millions of dollars. Round "Net income" answers to 3 decimal places and "Return on assets" answers to 2 decimal places.) es Net income Return on assets NoEquity NoDebt million % million %
You are considering a stock investment in one of two firms (NoEquity, Inc., and NoDebt, Inc.), both of which operate in the same industry and have identical EBITDA of $39.4 million and operating income of $15.5 million. NoEquity, Inc., finances its $70 million in assets with $69 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc., finances its $70 million in assets with no debt and $70 million in equity. Both firms pay a tax rate of 21 percent on their taxable income. Calculate the net income and return on assets-funders' investments-for the two firms. (Enter your dollar answers in millions of dollars. Round "Net income" answers to 3 decimal places and "Return on assets" answers to 2 decimal places.) Answer is not complete. NoEquity Net income $ 0.000 million Return on assets % NoDebt million %
Online Network Inc. has a net income of $700,000 in the current fiscal year. There are 100,000 shares of common stock outstanding, along with convertible bonds, which have a total face value of $1.5 million. The $1.5 million is represented by 1,500 different $1,000 bonds. Each $1,000 bond pays 6 percent interest. The conversion ratio is 10. The firm is in a 20 percent tax bracket. a. Compute basic earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.) Basic earnings per share C b. Compute diluted earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.) 200 Diluted earnings per share
You are considering a stock investment in one of two firms (NoEquity, Inc., and NoDebt, Inc.), both of which operate in the same industry and have identical EBITDA of $39.3 million and operating income of $16.5 million. NoEquity, Inc., finances its $75 million in assets with $74 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc., finances its $75 million in assets with no debt and $75 million in equity. Both firms pay a tax rate of 21 percent on their taxable income. Calculate the net income and return on assets-funders' investments-for the two firms. (Enter your dollar answers in millions of dollars. Round "Net income" answers to 3 decimal places and "Return on assets" answers to 2 decimal places.) Net income Return on assets NoEquity million % NoDebt million %
You are considering a stock investment in one of two firms (NoEquity, Inc., and NoDebt, Inc.), both of which operate in the same industry and have identical EBITDA of $39.5 million and operating income of $14.5 million. NoEquity, Inc., finances its $50 million in assets with $49 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc., finances its $50 million in assets with no debt and $50 million in equity. Both firms pay a tax rate of 21 percent on their taxable income. Calculate the net income and return on assets—funders’ investments—for the two firms. (Enter your dollar answers in millions of dollars. Round "Net income" answers to 3 decimal places and "Return on assets" answers to 2 decimal places.) NoEquity. NoDebt Net income million million Return on assets % %
Big Data Ltd has 7,500 shares of common stock outstanding at a price of $18 a share. It also has 8,000 shares of preferred stock outstanding at a price of $23 a share. There are 500 bonds outstanding that will mature in four years, have a face value of $1,000, and sell at 98.4 % of par. And the company tax rate is 34%. Calculate the market value of the company Calculate capital structure of the company. Identify the total weights of equity funding (rounded off to two decimal places) Calculate weighted average cost of capital (WACC) of the company under the traditional tax system, assuming that the required rate of return for ordinary equity is 12%, required rate of return for the preferred share is 14%, before-tax YTM of the bond is 10.5%.
You are considering a stock investment in one of two firms (AllDebt, Incorporated, and AllEquity, Incorporated), both of which operate in the same industry and have identical EBITDA of $15.6 million and operating income of $8.0 million. AllDebt, Incorporated, finances its $60 million in assets with $59 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. AllEquity, Incorporated, finances its $60 million in assets with no debt and $60 million in equity. Both firms pay a tax rate of 21 percent on their taxable income. Calculate the income available to pay the asset funders (the debt holders and stockholders) and resulting return on asset-funders' investment for the two firms. Note: Enter your dollar answers in millions of dollars. Round all answers to 3 decimal places. Income available for asset funders Return on asset-funders' investment AllDebt AllEquity million $ % 6.320 million 10.533 %
Online Network Inc. has a net income of $570,000 in the current fiscal year. There are 100,000 shares of common stock outstanding, along with convertible bonds, which have a total face value of $1.4 million. The $1.4 million is represented by 1,400 different $1,000 bonds. Each $1,000 bond pays 6 percent interest. The conversion ratio is 30. The firm is in a 40 percent tax bracket. a. Compute basic earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.) Basic eamings per share- b. Compute diluted earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.) Diluted earnings per share
You are considering a stock investment in one of two firms (NoEquity, Inc., and NoDebt, Inc.), both of which operate in the same industry and have identical operating income of $32.5 million. NoEquity, Inc., finances its $65 million in assets with $64 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc., finances its $65 million in assets with no debt and $65 million in equity. Both firms pay a tax rate of 30 percent on their taxable income. Calculate the net income and return on assets for the two firms. Return on assets = net income / total assets Accounting equation: total assets = total liabilities debt + total equity
Bonanza Billiard Games is an all-equity firm with 50 million shares outstanding, which are currently trading at $22 per share. Last month, Bonanza announced that it will change its capital structure by issuing $300 million in debt. The $200 million raised by this issue, plus another $200 million in cash that Bonanza already has, will be used to repurchase existing shares of stock. Assume that capital markets are perfect.• What is the market capitalization of the company before the transaction takes place?• What is the market capitalization of the company after the transaction takes place?
Big Data Ltd has 7,500 shares of common stock outstanding at a price of $18 a share. It also has 8,000 shares of preferred stock outstanding at a price of $23 a share. There are 500 bonds outstanding that will mature in four years, have a face value of $1,000, and sell at 98.4 % of par. And the company tax rate is 34%. a) Calculate the market value of the company b) Calculate capital structure of the company. Identify the total weights of equity funding (rounded off to two decimal places) Calculate weighted average cost of capital (WACC) of the company under the traditional tax system, assuming that the required rate of return for ordinary equity is 12%, required rate of return for the preferred share is 14%, before-tax YTM of the bond is 10.5%.
You are considering a stock investment in one of two firms (NoEquity, Incorporated, and NoDebt, Incorporated), both of which operate in the same industry and have identical EBITDA of $37.7 million and operating income of $32.5 million. NoEquity, Incorporated, finances its $65 million in assets with $64 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Incorporated, finances its $65 million in assets with no debt and $65 million in equity. Both firms pay a tax rate of 21 percent on their taxable income. Calculate the net income and return on assets-funders' investments-for the two firms. Note: Enter your dollar answers in millions of dollars. Round "Net income" answers to 3 decimal places and "Return on assets" answers to 2 decimal places. Net income Return on asset-funders' investment NoEquity million % 4

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Eagle Construction Co. is a successful privately-held firm owned by Marquette alumni. • It has $200 million bonds outstanding due in ten years with a 5% coupon paid semi-annually. They are valued at 90% of par value.