Based on Chapter $16$:

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Problem $1$: $(20$ points$)$

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XYZ$,$ Inc. has no debt outstanding and has a total market value of $$200,000.$

If the economy is normal, Earnings Before Interest and Taxes $($EBIT$)$ are projected to be $$16,000.$ If there is a strong expansion in the economy, EBIT will be $20\%$ higher, and if the economy falls into a recession, EBIT will be $25\%$ lower than normal.

XYZ is considering a $$50,000$ debt issue with an interest rate of $6\%.$ The proceeds will be used to repurchase shares of stock. Let the stock price be constant under all scenarios. Ignoring taxes, and assuming XYZ currently has $8,000$ shares of stock outstanding, answer the following questions:

Compute the Earnings Per Share $($EPS$)$ under each of the three economic scenarios.

Also compute the percentage changes in EPS when the economy expands, and enters a recession.

Repeat part $$a$$ assuming XYZ goes through with the capitalization. What can you say about the recapitalization?

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Problem $2$: $(20$ points$)$

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Bryzysky corporation has debt$-$equity ratio of $1\mathrm{.}2.$ Its WACC is $7\%,$ and its cost of debt is $4\%.$ Answer the following questions assuming the corporate tax rate is $21\%.$

What is Bryzysky$$s cost of equity capital?

What is Bryzyzky$$s unlevered cost of equity capital?

What would the cost of equity be if the debt$-$equity ratio were

$2?$

$1?$

$0?$

Comment on your answers.

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Based on Chapter $19$

Problem $3(20$ points$)$

The balance sheet of a firm in market value terms is shown below. There are $10,000$ shares of stock outstanding.

Market Value Balance Sheet

Cash

$$50,000$

Equity

$$400,500$

Fixed Assets

$350,500$

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Total

$$400,500$

Total

$$400,500$

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The firm has declared a dividend of $$1\mathrm{.}25$ per share. If the stock goes ex$-$dividend tomorrow, ignoring any tax effects:

What is the stock selling for today?What will it be selling for tomorrow?What will the balance sheet look like after the dividends are paid?

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Problem $4$: $(10$ points$)$

The market value balance sheet for a manufacturing is shown below. The firm has declared a stock dividend of $25\%.$ The stock goes ex$-$dividend tomorrow $($the chronology for a stock dividend is similar to that for a cash dividend$).$ If there $13,000$ shares outstanding what will the ex$-$dividend price be$?$

Market Value Balance Sheet:

Cash

$$100,000$

Debt

$$150,000$

Fixed Assets

$600,000$

Equity

$550,000$

Total

$700,000$

Total

$$700,000$

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Problem $5$: $(20$ points$)$

Using the information from problem $3$ above, suppose the firm announces it is going to repurchase $$12,500$ worth of stock.

What effect will this transaction have on the equity of the company?

How many shares will be outstanding?

What will the price per share be after the repurchase?

Ignoring tax effects, show how the share repurchase is effectively the same as a cash dividend.

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Problem $6$: $(10$ points$)$

A frim has $30,000$ shares outstanding, and a par value of $$0\mathrm{.}50$ per share.

If the firm declares a $3-$for$-1$ stock split, compute the new shares outstanding, and the new par value after the split.

If the firm declares a $1-$for$-4$ stock split, compute the new shares outstanding, and the new par value after the split.