GB550 unit6 Assignment

GB:550 Unit 6 Assignment

Chapter 13:
Question 13-5 Pg. 548

How is it possible for an employee stock option to be
valuable even if the firm’s stock price fails to meet shareholders’

Chapter 15:
Problem 15-8 Pg. 633-634

The Rivoli
Company has no debt outstanding, and its financial position is given by the
following data:

(book=market) $3,000,000

EBIT $500,000

Cost of
Equity, rs 10%

Stock Price,
P0 $15

Outstanding, n0 200,000

Tax Rate, T
(Federal-plus-State) 40%

The firm is
considering selling bonds and simultaneously repurchasing some of its stock. If
it moves to a capital structure with 30% debt based on market values, its cost
of equity will increase to 11% to reflect the increased risk. Bonds can be sold
at a cost of 7%. Rivoli is a no-growth firm. Hence, all its earnings are paid
out as dividends. Earnings are expected to be constant over time.

What effects would this use of leverage have on
the value of the firm?

What would be the price of Rivoli’s stock?

What happens to the firm’s earnings per share
after the recapitalization?

The $500,000 EBIT given previously is actually
the expected value from the following probability distribution:

Probability EBIT

0.10 ($ 100,000)

0.20 200,000

0.40 500,000

0.20 800,000

0.10 1,100,000

the times-interest-earned ratio for each probability. What is the probability
of not covering the interest payment at the 30 % debt level?