Capital structure analysis the rivoli company has no debt

Capital Structure Analysis
The Rivoli Company has no debt outstanding, and its financial position is given by the following data:
Assets (Market value = book value) $3,000,000
EBIT $500,000
Cost of equity, rs 10%
Stock price, Po $15
Shares outstanding, no 200,000
Tax rate, T (federal-plus-state) 40%
The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 8%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.
a. What effect would this use of leverage have on the value of the firm?
I. Increasing the financial leverage by adding debt results in an increase in the firm’s value.
II. Increasing the financial leverage by adding debt results in a decrease in the firm’s value.
III. Increasing the financial leverage by adding debt has no effect on the firm’s value.
b. What would be the price of Rivoli’s stock? Round your answer to the nearest cent, e.g.
$per share
c. What happens to the firm’s earnings per share after the recapitalization? Round your answer to the nearest cent.
EPS by $
d. The $500,000 EBIT given previously is actually the expected value from the following probability distribution:
Probability EBIT
0.10 – $ 90,000
0.20 200,000
0.40 450,000
0.20 800,000
0.10 1,290,000
Determine the times-interest-earned ratio for each probability. Round your answers to two decimal places.
Probability TIE
0.10
0.20
0.40
0.20
0.10
What is the probability of not covering the interest payment at the 30 percent debt level? Round your answer to two decimal places.
%.

 

 

Place your order
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more