Input Area:

Market value $ 245,000

EBIT $ 19,000
Expansion-EBIT 25%
Recession-EBIT 40%
Debt issue $ 58,800
Interest rate 8%
Shares outstanding 5,000
Tax rate 21%

Output Area:

No debt with taxes

EBIT $ 11,400 $ 19,000 $ 23,750
Interest
Taxes 2,394 3,990 4,988
NI $ 9,006 $ 15,010 $ 18,763
EPS $ 1.80 $ 3.00 $ 3.75
Change EPS% -40.00% 0.00% 25.00%

With debt and taxes

Share price = $ 49.00
Shares repurchased = 1,200.00

EBIT $ 11,400 $ 19,000 $ 23,750

Interest 4,704### 4,704 4,704
Taxes 1,406 3,002 4,000
NI $ 5,290### $ 11,294 $ 15,046
EPS $ 1.39### $ 2.97 $ 3.96
Change EPS% -53.16% 0.00% 33.23%
 Input Area:

Plan I:
Shares outstanding 3,500
Debt outstanding $ 37,440
Plan II:
Shares outstanding 2,800
Debt outstanding $ 66,560
Interest rate 10% EPS = (EB

a. EBIT $ 14,800
Stock outstanding 4,400
d. Tax rate 21%

Output Area:

a. I II All-Equity
EBIT $ 14,800 $ 14,800 $ 14,800
Interest 3,744 6,656 -
NI $ 11,056 $ 8,144 $ 14,800
EPS $ 3.16 $ 2.91 $ 3.36

EBIT
b. Plan I vs. all equity $ 18,304
Plan II vs. all equity $ 18,304
The break even levels of EBIT are the same because of M&M Proposition I.

c. Breakeven EBIT: Plan I vs. Plan II $ 18,304

This break-even level of EBIT is the same as in part (b) again, because of M&M
Proposition I.

d. I II All-equity
EBIT $ 14,800 $ 14,800 $ 14,800
Interest 3,744 6,656 -
Taxes 2,322 1,710 3,108
NI $ 8,734### $ 6,434 $ 11,692
EPS $ 2.50### $ 2.30 $ 2.66

Breakeven EBIT
Plan I vs. all-equity $ 18,304
Plan II vs. all-equity $ 18,304
PLanI vs. Plan II $ 18,304

The break-even levels of EBIT do not change because of addition of taxes reduces
the income of all three plans by the same percentage; therefore they do not change
relative to one another.
EPS = (EBIT – RBB)/Shares outstanding

0.000058 1.07 18,304

0.000130 2.377 18,304
 Input Area:

Percent debt 35%

Shares outstanding 5,000
Price $ 49
EBIT $ 43,600
Interest rate 7%
Shareholder:
Shares owned 100
Dividend payout rate 100%

Output Area:

a. EPS $ 8.72
Shareholder's cash flow $ 872.00

b. V $ 245,000
D $ 85,750
Shares bought 1,750
NI $ 37,598
EPS $ 11.57
Shareholder's cash flow $ 1,156.85

c. Sell 35 shares of stock and

lend the proceeds at 7%
Interest cash flow $ 120.05
Cash flow from shares held $ 751.95
Total cash flow $ 872.00

d. The capital structure is irrelevant because

shareholders can create their own leverage
or unlever the stock to create the payoff they
desire, regardless of the capital structure the
firm actually chooses.
 Input Area:

Debt-equity ratio 1.5

WACC 9.8%
Cost of debt 6%
Tax rate 21%
c. Debt-equity ratio 2.00
Debt-equity ratio 1.00
Debt-equity ratio 0.00

Output Area:

a. RE 17.39%

b. RU 11.21%

c. RE I
RE II
RE III = WACC
 Input Area:

Alpha shares outstanding 18,000

Alpha stock price $ 35
Beta debt value $ 85,000
Cost of Beta's debt 9%
EBIT $ 93,000
Investor borrowing rate 9%
d. Percentage of company
to buy 20%

Output Area:

a. Value of Alpha

b. Value of Beta

c. Value of Beta's equity

d. Cost to buy Alpha

Cost to buy Beta

e. Dollar return from Alpha

Interest on Beta debt

Dollar return from Beta

f. Amount to borrow
Interest paid by investor

Dollar return by borrowing

and buying Alpha
g. The equity of Beta Corporation is riskier. Beta
must pay off its debtholders before its
equityholders receive any of the firm’s earnings.
If the firm does not do particularly well, all of the
firm’s earnings may be needed to repay its
debtholders, and equityholders will receive nothing.
 Chapter 16
Question 24

Input Area:

Debt issue $ 1,600,000

Interest rate 6%
Current firm value $ 6,100,000
Shares outstanding 280,000
Annual pretax earnings $ 1,450,000
Tax rate 21%

Output Area:

a. Annual taxes

R0

b. Share price

Debt
Assets Equity
Total assets Total D&E

c. PV(tax shield)

Old assets Debt

Assets Equity
Total assets Total D&E

d. New share price

e. Shares repurchased

New shares outstanding

f. Old assets Debt
Assets Equity
Total assets Total D&E

g. RS