ZuoTi.Pro
Question

Thompson Electronics, Inc., is presently 100 percent equity financed and has assets of $100 million. Thompson’s...

Thompson Electronics, Inc., is presently 100 percent equity financed and has assets of $100 million. Thompson’s present net income is $9 million, and the company’s marginal and average tax rates are 40 percent. In addition, Thompson has 4 million common shares outstanding, and its current annual dividend is $0.75 a share. Currently, the company is able to borrow 10 percent perpetual debt, that is, debt that has no maturity date. What amount of 10 percent perpetual debt would Thompson have to borrow in order to increase its return on stockholders’ equity to 15 percent, assuming that the debt proceeds are used to retire equity?

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Let x be the amount of perpetual debt
15%=(9/0.6-x*10%)*(1-40%)/(100-x)
=>x=66.55

Hence, amount of debt to be borrowed is $66.55 million

0 0
Add a comment
Know the answer?
Add Answer to:
Thompson Electronics, Inc., is presently 100 percent equity financed and has assets of $100 million. Thompson’s...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Garwryk, Inc., which is financed with debt and​ equity, presently has a debt ratio of 79...

    Garwryk, Inc., which is financed with debt and​ equity, presently has a debt ratio of 79 percent. What is the​ firm's equity​ multiplier? How is the equity multiplier related to the​ firm's use of debt financing​ (i.e., if the firm increased its use of debt financing would this increase or decrease its equity​ multiplier)? Explain. What is the​ firm's equity​ multiplier? The equity multiplier is given​ by: Equity Multiplier equals StartFraction 1 Over 1 minus Debt Ratio EndFraction The equity...

  • TB, Inc. has a 20 percent tax rate and has $61.00 million in assets, currently financed...

    TB, Inc. has a 20 percent tax rate and has $61.00 million in assets, currently financed entirely with equity. Equity is worth $5 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Pessimistic Optimistic Probability of state 0.45 0.55 Expected EBIT...

  • Dickinson Company has $11,940,000 million in assets. Currently half of these assets are financed with long-term...

    Dickinson Company has $11,940,000 million in assets. Currently half of these assets are financed with long-term debt at 9.7 percent and half with common stock having a par value of $8. Ms. Smith, Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 9.7 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so...

  • Q1. Firm XYZ is currently financed entirely with equity. The market value of the firm's assets...

    Q1. Firm XYZ is currently financed entirely with equity. The market value of the firm's assets and equity is ?? = ?? = 500, and the expected return on the firm's assets and equity is ?? = ?? = 12.5 percent. Suppose the firm issues debt with a value of ? = 200, and uses the proceeds to retire equity. The market value of the firm remains the same, ?? = ?? + ? = 500. If the expected return...

  • GTB, Inc., has a 20 percent tax rate and has $85,656,000 in assets, currently financed entirely...

    GTB, Inc., has a 20 percent tax rate and has $85,656,000 in assets, currently financed entirely with equity. Equity is worth $6 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Pessimistic Optimistic Probability of state 0.44 0.56 Expected EBIT in...

  • A firm has the following capital structure: £100 million of equity (market value) with 100 million...

    A firm has the following capital structure: £100 million of equity (market value) with 100 million shares outstanding, and £100 million of debt. The beta of the firm’s stock is 1.6. The firm’s cost of equity is 10 percent, and the yield on riskless bonds is 2 percent. There is no tax. Assuming that the firm can borrow at the risk-free rate and that both CAPM (Capital Asset Pricing Model) and the Modigliani-Miller theorem hold, answer the following questions. i)...

  • The firm is an all-equity firm with assets worth $350 million and 100 million shares outstanding....

    The firm is an all-equity firm with assets worth $350 million and 100 million shares outstanding. It plans to borrow $100 million and use these funds to repurchase shares. The firm’s marginal corporate tax is 21%, and it plans to keep its outstanding debt equal to $100 million permanently. If the firm manages to repurchase shares at $4 per share, what is the per share value of equity for the leveraged firm? $2.71 per share B) $3.5 per share C)...

  • The firm is an all-equity firm with assets worth $350 million and 100 million shares outstanding....

    The firm is an all-equity firm with assets worth $350 million and 100 million shares outstanding. It plans to borrow $100 million and use these funds to repurchase shares. The firm’s marginal corporate tax is 21%, and it plans to keep its outstanding debt equal to $100 million permanently. If the firm manages to repurchase shares at $4 per share, what is the per share value of equity for the leveraged firm? A) $2.71 per share B) $3.5 per share...

  • The firm is an all-equity firm with assets worth $350 million and 100 million shares outstanding....

    The firm is an all-equity firm with assets worth $350 million and 100 million shares outstanding. It plans to borrow $100 million and use these funds to repurchase shares. The firm’s marginal corporate tax is 21%, and it plans to keep its outstanding debt equal to $100 million permanently. If the firm manages to repurchase shares at $4 per share, what is the per share value of equity for the leveraged firm? A) $2.71 per share B) $3.5 per share...

  • The firm is an all-equity firm with assets worth $350 million and 100 million shares outstanding....

    The firm is an all-equity firm with assets worth $350 million and 100 million shares outstanding. It plans to borrow $100 million and use these funds to repurchase shares. The firm’s marginal corporate tax is 21%, and it plans to keep its outstanding debt equal to $100 million permanently. If the firm manages to repurchase shares at $4 per share, what is the per share value of equity for the leveraged firm? A) $2.71 per share B) $3.5 per share...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT