Stoneware Inc., a manufacturer of kitchen countertops has 1,000,000 shares of stock that sell for $5 per share. The firm currently has no debt and its assets consist of $500,000 in cash and the remaining in fixed assets. The rate of return required by the firm’s shareholder is 16%, and the corporate tax rate is 34%. Both investors and the firm’s managers expect that if no changes are made the firm will have the same annual EBIT as was earned last year in perpetuity. What is the expected EBIT?

Stoneware now plans to expand its business. It will issue $2,000,000 (principal) of debt at 98% of par with an annual coupon payment of 5% and maturity of 5 years in order to purchase additional fixed assets. If the APV of the project is $500,000, construct:

a) The market value balance sheet after the announcement but before the issuance of debt.

b) The market value balance sheet immediately after the issuance of debt.

c) Assume that the book value of assets equals the replacement value. Compute Tobin’s Q for Stoneware after the issuance of debt.

Answer rating: 100% (QA)

a The market value balance sheet after the announcement but befo... View the full answer