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 101 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
YES! Correct, THANKS for helping me on my review


Laurenleakan

  • Member
  • Posts: 309
Reply 3 on: Yesterday
Great answer, keep it coming :)

 

Did you know?

Many medications that are used to treat infertility are injected subcutaneously. This is easy to do using the anterior abdomen as the site of injection but avoiding the area directly around the belly button.

Did you know?

A cataract is a clouding of the eyes' natural lens. As we age, some clouding of the lens may occur. The first sign of a cataract is usually blurry vision. Although glasses and other visual aids may at first help a person with cataracts, surgery may become inevitable. Cataract surgery is very successful in restoring vision, and it is the most frequently performed surgery in the United States.

Did you know?

Human stomach acid is strong enough to dissolve small pieces of metal such as razor blades or staples.

Did you know?

Elderly adults are living longer, and causes of death are shifting. At the same time, autopsy rates are at or near their lowest in history.

Did you know?

A strange skin disease referred to as Morgellons has occurred in the southern United States and in California. Symptoms include slowly healing sores, joint pain, persistent fatigue, and a sensation of things crawling through the skin. Another symptom is strange-looking, threadlike extrusions coming out of the skin.

For a complete list of videos, visit our video library