Assume that Firm A is an all-equity firm with total assets of $1,000 and the following distribution ofEBIT for the coming year:ProbabilityEBITInterestEBTTaxes (40%)Net IncomeBEPROAROE1.99%2.79%3.49%Firm A(Unlevered)2.32%2.83%Bad30%$120SO$120$48$7212.0%7.2%EconomyAverageNow assumeAs you can calculate, the standard deviation of the ROE distribution is 1.39 percenthat the firm plans to issue $300 of debt, at an interest rate of 10 percent, and use the proceeds torepurchase equity (you may ignore potential impacts on price and assume that the firm will thenhave $700 of equity). Determine the standard deviation of the new ROE distribution if the firmdoes issue this debt.40%$150$0$150-$60$90Good30%$180SO$180-$72$10815.0%18.0%9.0%10.8%9.0% 10.8%

Name: Assume that Firm A is an all-equity firm with total assets of $1,000
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Description: Assume that Firm A is an all-equity firm with total assets of $1,000 and the following distribution ofEBIT for the coming year:ProbabilityEBITInterestEBTTaxes (40%)Net IncomeBEPROAROE1.99%2.79%3.49%Firm A(Unlevered)2.32%2.83%Bad30%$120SO$120$48$7212

If the company issues debt, we must apply the standard deviation of a portfolio calculation, which…

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Assume that Firm A is an all-equity firm with total assets of $1,000 and the following distribution of EBIT for the coming year: Probability EBIT Interest EBT Taxes (40%) Net Income BEP ROA ROE 1.99% Ⓒ 2.79% Firm A (Unlevered) O 3.49% O 2.32% 2.83% Bad 30% $120 SO $120 -$48 $72 12.0% 7.2% 7.2% Economy Average 40% $150 $0 $150 -$60 $90 As you can calculate, the standard deviation of the ROE distribution is 1.39 percent. Now assume that the firm plans to issue $300 of debt, at an interest rate of 10 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $700 of equity). Determine the standard deviation of the new ROE distribution if the firm does issue this debt. Good 30% $180 SO $180 -$72 $108 15.0% 18.0% 9.0% 10.8% 9.0% 10.8%

Assume that Firm A is an all-equity firm with total assets of $1,000 and the following distribution of EBIT for the coming year: Probability EBIT Interest EBT Taxes (40%) Net Income BEP ROA ROE 1.99% Ⓒ 2.79% Firm A (Unlevered) O 3.49% O 2.32% 2.83% Bad 30% $120 SO $120 -$48 $72 12.0% 7.2% 7.2% Economy Average 40% $150 $0 $150 -$60 $90 As you can calculate, the standard deviation of the ROE distribution is 1.39 percent. Now assume that the firm plans to issue $300 of debt, at an interest rate of 10 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $700 of equity). Determine the standard deviation of the new ROE distribution if the firm does issue this debt. Good 30% $180 SO $180 -$72 $108 15.0% 18.0% 9.0% 10.8% 9.0% 10.8%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 6P

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