% 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 .