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Question: Foundation, Inc., is comparing two different


Foundation, Inc., is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 145,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $716,000 in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
a. If EBIT is $300,000, which plan will result in the higher EPS?
b. If EBIT is $600,000, which plan will result in the higher EPS?
c. What is the break-even EBIT?



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> Stockton Mineral Operations, Inc. (SMO), currently has 540,000 shares of stock outstanding that sell for $83 per share. Assuming no market imperfections or tax effects exist, what will the share price be after: a. SMO has a 5-for-3 stock split? b. SMO ha

> For the company in Problem 2, show how the equity accounts will change if: a. The company declares a 4-for-1 stock split. How many shares are outstanding now? What is the new par value per share? b. The company declares a 1-for-5 reverse stock split. How

> The owners’ equity accounts for Vulcano International are shown here: Common stock ($.50 par value) …………….. $ 20,000 Capital surplus …………………………………….. 210,000 Retained earnings ………………………………… 587,300 Total owners’ equity …………………………… $ 817,300 a. If the c

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> Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers? Problem 6: Dickson Corp. is comparing two different capital structures. Plan I would result in 12,700 shares of stoc

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> Suppose the company in Problem 1 has a market-tobook ratio of 1.0 and the stock price remains constant. a. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. Also calculate the percentage changes in ROE

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> Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant. Problem 1: Fujita, Inc., has no debt outstanding and a total market value of $222,000. Earnings

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> Cookies ’n Cream, Inc., recently issued new securities to finance a new TV show. The project cost $45 million, and the company paid $2.2 million in flotation costs. In addition, the equity issued had a flotation cost of 7 percent of the amount raised, wh

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> Fujita, Inc., has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent

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> In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced? Problem 18: Stock Y has a beta of 1.2 and an expected return of 11.5 percent. Stock Z has a beta of .80 and an expected return of 8.5 percent. I

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> Suppose Wacken, Ltd., just issued a dividend of $2.73 per share on its common stock. The company paid dividends of $2.31, $2.39, $2.48, and $2.58 per share in the last four years. If the stock currently sells for $43, what is your best estimate of the co

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