Question

#14 unanswered Caddyshack Productions incorporated is seeking to take out a new loan from Spackler Bank and Trust. The loan will be for $500,000.00 and pay a 6.00% annual interest rate. Before this loan, Caddyshack was paying $25,000.00 in interest per year. The company will use the loan to expand business. Judd Smails, the CEO, reported that the current EBIT for Caddyshack is $150,000.00. With the expansion, the EBIT will increase to $200,000.00. not_submitted Attempts Remaining: Infinity Will the default risk for Caddyshack increased or decreased with the loan? Submit Answer format: Text #15 unanswered A firm has a reported enterprise value of $44.00 billion. The firm has $13.00 billion of debt on its balance sheet, and $1.00 billion in cash. The firm also reports $6.00 billion in shareholder equity with 500.00 million shares outstanding. Finally, the firm reported $790.00 million in net income last year. not_submitted Attempts Remaining: Infinity What is the P/E ratio for the firm? 21.05 Submit Answer format: Number: Round to: 2 decimal places.

Answer 1

TIE Ratio = EBIT/Interest Expense

Prior to loan = 150,000/25000

= 6 times

TIE post loan = 200,000/(25000+500,000*6%)

= 3.6363 times

Default risk increased as TIE ratio decreased. Lower the ratio, higher will be the default risk

P/E Ratio = (Enterprise value – Debt + cash)/Net Income

= (44 -13+1)/0.790

= 40.5063 times