1.Organic Produce Corporation has 7.5 million shares of common stock outstanding
ID: 2759326 • Letter: 1
Question
1.Organic Produce Corporation has 7.5 million shares of common stock outstanding, 500,000 shares of 7% preferred stock outstanding, and 175,000 of 8.2% semiannual bonds outstanding, par value of $1,000 each. The common stock currently sells for $64 per share and has a beta of 1.2, the preferred stock currently sells for $108 per share, and the bonds have 15 years to maturity and sell for 96% of par. The market risk premium is 6.8%, T-Bills are yielding 5.5%, and the firm’s tax rate is 34%.
1.A. What is the firm’s market value capital structure?
1.B. If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows?
2. The Savannah Company has 10,000 shares of common stock outstanding with a par value of $40, and its tax rate is 48%. The Savannah Company is weighing the choice among three financing alternatives for a major expansion program which would require $100,000 and increase its operating profit from $90,000 to $125,000. The financing alternative to raise the needed $100,000 are as follows:
2,000 common shares at $50 net to the company.
$100,000 of 7% preferred stock.
$100,000 of 6% bonds.
Assuming an EBIT of $125,000 for each alternative, determine the EPS for each financing plan.
3. The following is the abbreviated balance sheet for Boston DuckBoat Company. Cash = $500, Other Assets = $7500, Debt = $0, Equity = $8000, Shares outstanding = 100. What is Duckboat's price per share?
a. $5
b. $75
c. $80
d. $85
e. $90
PLEASE ANSWER ALL QUESTIONS AND SHOW ALL WORK
Explanation / Answer
Question 3:
Price per share = market value of equity/ no. of shares
= 8000 / 100
= 80 per share
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