Question : Kennesaw Steel Corporation As Chief Financial Officer of the Kennesaw Steel : 1325736

 

 

Kennesaw Steel Corporation

As Chief Financial Officer of the Kennesaw Steel Corporation (KSC), you are considering a recapitalization plan that would convert KSC from its current all-equity capital structure to one including substantial financial leverage. KSC now has 100,000 shares of common stock outstanding, which are selling for $50.00 each, and the recapitalization proposal is to issue $2,000,000 worth of long-term debt at an interest rate of 8.0 percent and use the proceeds to repurchase $2,000,000 of common stock.

 

51.Refer to Kennesaw Steel Corporation. What is the new debt-to-equity ratio if the recapitalization is completed? (assume that the stock can be repurchased at $50 per share)

a.1.50

b.1.00

c.0.67

d.0.33

 

 

 

52.Refer to Kennesaw Steel Corporation. How many shares will be left outstanding after the re-capitalization? (assume that the stock can be repurchased at $50 per share)

a.60,000

b.50,000

c.45,000

d.40,000

 

 

 

53.Refer to Kennesaw Steel Corporation. The tax rate is 40%. What level of EBIT will earnings per share equal zero for shareholders under the new capital structure? (assume that the stock can be repurchased at $50 per share)

a.$0

b.$60,000

c.$120,000

d.$160,000

 

 

 

54.Refer to Kennesaw Steel Corporation. The tax rate is 40%. At what level of EBIT will earnings per share be equal for shareholders under each capital structure? (assume that the stock can be repurchased at $50 per share)

a.$350,000

b.$400,000

c.$450,000

d.$500,000

 

 

 

 

55.Refer to Kennesaw Steel Corporation. The tax rate is 40%. What is the earnings per share under the new plan if EBIT is $600,000 in the next year? (assume that the stock can be repurchased at $50 per share)

a.$4.40

b.$4.20

c.$4.00

d.$3.80

 

 

 

56.Refer to Kennesaw Steel Corporation. The tax rate is 40%. What is the return on equity under the new plan if EBIT is $600,000 in the next year? (assume that the stock can be repurchased at $50 per share)

a.7.4%

b.8.1%

c.8.8%

d.9.5%

 

 

 

57.Which statement is TRUE regarding a firm that increases financial leverage?

a.Average earnings per share increases, while shareholder risk increases.

b.Average earnings per share increases, while shareholder risk decreases.

c.Average earnings per share decreases, while shareholder risk decreases.

d.Average earnings per share decreases, while shareholder risk increases.

 

 

 

58.The Globe Incorporated has EBIT of $20 million for the current year. On the firm balance sheet, there is $80 million of debt outstanding that carries a coupon rate of 8 percent. Investors seek a return of 12 percent on the firm, and the firm has a corporate tax rate of 40%. What is the value of the firm?

a.$124,000,000

b.$128,000,000

c.$132,000,000

d.$136,000,000

 

 

 

59.The Globe Incorporated has EBIT of $30 million for the current year. On the firm balance sheet, there is $90 million of debt outstanding that carries a coupon rate of 9 percent. Investors seek a return of 12 percent on the firm, and the firm has a corporate tax rate of 40%. What is the value of the firm?

a.$152,000,000

b.$160,000,000

c.$174,000,000

d.$186,000,000

 

 

 

60.The Globe Incorporated has EBIT of $20 million for the current year. On the firm balance sheet, there is $80 million of debt outstanding that carries a coupon rate of 8 percent. Investors seek a return of 12 percent on the firm, and the firm has a corporate tax rate of 40%. What is the present value of the firm’s tax shields?

a.$32,000,000

b.$30,000,000

c.$24,000,000

d.$6,400,000