Question

1) Here are book- and market-value balance sheets of the United Frypan Company: 

Book-Value Balance Sheet

Net working capital $ 80 Debt $55

Long-term assets 20 Equity 45

$100 $100

Market-Value Balance Sheet

Net working capital $ 80 Debt $ 55

Long-term assets   145 Equity   170  

$ 225   $ 225  

Assume that MM’s theory holds except for taxes. There is no growth, and the $55 of debt is expected to be permanent. Assume a 37% corporate tax rate.

 a. How much of the firm’s market value is accounted for by the debt-generated tax shield?

PV tax shield ___________

b. What is United Frypan’s after-tax WACC if r_Debt = 6.0% and r_Equity = 17.0%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

WACC _________%

c. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax purposes. What will be the new value of the firm, other things equal? Assume a borrowing rate of 6.0%.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

New Value of the Firm ___________

2) River Cruises is all-equity-financed.

  Current Data         Number of shares   100,000              

Price per share $ 10              

Market value of shares $ 1,000,000                

State of the Economy  

Slump  Normal Boom

Profits before interest $ 71,500     118,000     179,500

Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round “Earnings per share” to 3 decimal places. Enter “Return on shares” as a percent rounded to 2 decimal places.)

                                               Outcomes

Number of Shares                 __________

Price per Share                     __________

Market Value of Shares        __________

Market Value of Debt           __________

State of the Economy

Slump                   Normal                 Boom

Profits Before Interest   71,500                  118,000                179,500

Interest                               __________      __________      __________

Equity Earnings                 __________      __________      __________

Earnings Per Share         __________      __________      __________

Return on Shares             __________%   __________%   __________%

 

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Question

Need help on the practice problem below on section b.

Specifications for a part

for a DVD player state that the part should weigh between 24.9 and 25.9 ounces. The process that produces the parts has a mean of 25.4 ounces and a standard deviation of .22 ounce. The distribution of output is normal. Use Table-A.

a.What percentage of parts will not meet the weight specs? (Round your “z” value and final answer to 2 decimal places. Omit the “%” sign in your response.)

Percentage of parts        2.32% (This one i got right)

b.Within what values will 99.74 percent of sample means of this process fall, if samples of n = 12 are taken and the process is in control (random)? (Round your answers to 2 decimal places.)

Lower value ? Upper value ?

 

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