% Equity 60 % Shares outstanding $ 5,000,000 Tax rate 40 %( a) 37.2 %( b) 39.1 %( c) 41.2 %( d) 43.3 %( e) 45.5 %( Points: 20)
Question 2.2.( TCO F) Warren Corporation’ s stock sells for $ 42 per share. The company wants to sell some 20-year, annual interest, $ 1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $ 47. The firm’ s straight bonds yield 10 %. Each warrant is expected to have a market value of $ 2.00 given that the stock sells for $ 42. What coupon interest rate must the company set on the bonds in order to sell the bondswith-warrants at par?( a) 7.83 %( b) 8.24 %( c) 8.65 %( d) 9.08 %( e) 9.54 %( Points: 20)
Question 3.3.( TCO B) Reynolds Resorts is currently 100 % equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9 % and use the proceeds to repurchase common stock. The recapitalization would not change the company’ s total assets, nor would it affect the firm’ s basic earning power, which is currently 15 %. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?
( a) The company’ s net income would increase.( b) The company’ s earnings per share would decline.( c) The company’ s cost of equity would increase.( d) The company’ s ROA would increase.( e) The company’ s ROE would decline.( Points: 20)
Question 4.4.( TCO G) Which of the following statements is most correct?( a) Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained unaltered since that time.( b) Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal bankruptcy are governed solely by state laws.( c) All bankruptcy petitions are filed by creditors seeking to protect their claims against firms in financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm’ s management.