ABC Corporation has total assets of $1,000. Currently, it is an all equity firm. There are three
Question:
ABC Corporation has total assets of $1,000. Currently, it is an all equity firm. There are three possible economic scenarios and the ROA in these scenarios are as follows: in recession, the ROA is 5%; in the expected scenario, the ROA is 15%; and in expansion, the ROA is 25%. The current stock price is $10.
Now assume that, to begin with, ABC Corporation is a levered firm with a debt-equity ratio of 1:4. Everything else is the same as above. Now, another investor has $120 to invest but wants to create the same effect of investing in an all-equity firm. To do that, he must
A. Buy 9.6 shares and invest $24
B. Buy 10.1 shares and invest $19
C. Buy 10.6 shares and invest $14
D. Buy 11.1 shares and invest $9
E. Buy 11.6 shares and invest $4
Please show your work for problems
Principles of Managerial Finance
ISBN: 978-1408271582
Arab World Edition
Authors: Lawrence J. Gitman, Chad J. Zutter, Wajeeh Elali, Amer Al Roubaix