This topic contains a solution. Click here to go to the answer

Author Question: Jungle Cat Petting Zoo Inc. is currently all equity financed. It used to be leveraged, but it ... (Read 130 times)

lilldybug07

  • Hero Member
  • *****
  • Posts: 546

Question 1

If you are a CFO who wants to maximize the market value of your company, what is the optimal D/V ratio according to M&M Proposition I (with taxes).
◦ It doesn't matter.
◦ D/V = 0
◦ D/V = 1
◦ D/V = ∞

Question 2

Jungle Cat Petting Zoo Inc. is currently all equity financed. It used to be leveraged, but it recently issued 5,000 new shares at $50 per share. The proceeds from the new issue were used to repay all of its debt. Financial details for the current and old capital structures are presented in the table below. 
Assume that Jungle Cat generates perpetual annual EBIT at a constant level. Assume that all cash flows occur at the end of the year and we are currently at the beginning of a year. Assume that taxes are zero. Assume that all of net income is paid out as a dividend. Assume that the debt is perpetual with annual coupons at 3%. Assume that individual investors can borrow and lend at the same interest rate (and with the same terms) as corporations.
Leo Delgato is a shareholder in Jungle Cat who owns 6,750 shares. After the new issue, Leo is unhappy with his dividends. How many shares does Leo have to buy (or sell) in order to return his annual cash flows to the level he enjoyed when the company was leveraged? 

Capital StructureCapital Structure
Old (Levered)Current (All-Equity)
EBIT$125,000 $125,000 
Debt, D$250,000$0
Cost of Debt, kd3%N/A
Shares Outstanding45,00050,000
Stock Price$50.00 $50.00 
Dividends per share$2.611$2.50

◦ Buy 750 shares
◦ Sell 750 shares
◦ Buy 675 shares
◦ Sell 675 shares
◦ Do nothing. The investment cash flows are identical under each capital structure


Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by lilldybug07 on Apr 25, 2021

asdfghjkl;

  • Sr. Member
  • ****
  • Posts: 323
Lorsum iprem. Lorsus sur ipci. Lorsem sur iprem. Lorsum sur ipdi, lorsem sur ipci. Lorsum sur iprium, valum sur ipci et, vala sur ipci. Lorsem sur ipci, lorsa sur iprem. Valus sur ipdi. Lorsus sur iprium nunc, valem sur iprium. Valem sur ipdi. Lorsa sur iprium. Lorsum sur iprium. Valem sur ipdi. Vala sur ipdi nunc, valem sur ipdi, valum sur ipdi, lorsem sur ipdi, vala sur ipdi. Valem sur iprem nunc, lorsa sur iprium. Valum sur ipdi et, lorsus sur ipci. Valem sur iprem. Valem sur ipci. Lorsa sur iprium. Lorsem sur ipci, valus sur iprem. Lorsem sur iprem nunc, valus sur iprium.
Answer Preview
Only 30% of students answer this correctly




lilldybug07

  • Member
  • Posts: 546
Reply 2 on: Apr 25, 2021
Thanks for the timely response, appreciate it


at

  • Member
  • Posts: 359
Reply 3 on: Yesterday
Gracias!

 

Did you know?

Adolescents often feel clumsy during puberty because during this time of development, their hands and feet grow faster than their arms and legs do. The body is therefore out of proportion. One out of five adolescents actually experiences growing pains during this period.

Did you know?

The Centers for Disease Control and Prevention has released reports detailing the deaths of infants (younger than 1 year of age) who died after being given cold and cough medications. This underscores the importance of educating parents that children younger than 2 years of age should never be given over-the-counter cold and cough medications without consulting their physicians.

Did you know?

Aspirin is the most widely used drug in the world. It has even been recognized as such by the Guinness Book of World Records.

Did you know?

Excessive alcohol use costs the country approximately $235 billion every year.

Did you know?

Congestive heart failure is a serious disorder that carries a reduced life expectancy. Heart failure is usually a chronic illness, and it may worsen with infection or other physical stressors.

For a complete list of videos, visit our video library