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Assignment I

Intermediate accounting 2

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10 views

Assignment I

Intermediate accounting 2

Uploaded by

jdesta370
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment I

ARSI UNIVERSITY
COLLEGE OF BUSINESS & ECONOMICS
DEPARTMENT OF ACCOUNTING & FINANCE
Financial Management II Max.Mark: 15%

Instructions:
➢ Only a hand written work is acceptable
➢ Is group Assignment

1. Is there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or
why not?
2. The Habitat Corporation has a WACC of 18 per-cent. Its cost of debt is 14 percent. If Habitat’s
debt-equity ratio is 2, what is its cost of equity capital? M&M Proposition II (no taxes)
3. GG company expects an EBIT of $10,000 every year forever. GG can borrow at 7 percent.
Suppose GG currently has no debt, and its cost of equity is 17 percent. If the corporate tax rate
is 21 percent, what is the value of the firm? What will the value be if GG borrows $15,000 and
uses the proceeds to repurchase stock? M&M I (with taxes)
4. The most recent financial statements for Mandy Co. are shown here:

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a
constant 30 percent dividend payout ratio.

Required: 1. What is the internal growth rate?


2. what is the sustainable growth rate?

. Submission date: 30/11/2024


. Assignment I

5. Tempest Corporation expects an EBIT of $37,700 every year forever. The company currently
has no debt, and its cost of equity is 11 percent. The tax rate is 22 percent. (MM I with tax)
A. Suppose the company can borrow at 6 percent. What will the value of the firm be if the
company takes on debt equal to 50 percent of its unlevered value? What if it takes on
debt equal to 100 percent of its unlevered value?
B. What will the value of the firm be if the company takes on debt equal to 50 percent of its
levered value? What if the company takes on debt equal to 100 percent of its levered
value?
6. Assume a company with 800,000 shares of $10 par common stock outstanding pays a 30%
stock dividend. The pre-dividend market value is $50.
Before Stock Dividend
Common stock
($10 par; 800,000 shares) $ 8,000,000
Additional paid-in capital 2,000,000
Retained earnings 6,000,000
Total shareholders’ equity $16,000,000

Required: Show the effect of 30% stock dividend on equity section of the company?

. Submission date: 30/11/2024

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