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’

expectations?

__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:

Assets

(book=market) $3,000,000

EBIT $500,000

Cost of

Equity, rs 10%

Stock Price,

P0 $15

Shares

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.

a.

What effects would this use of leverage have on

the value of the firm?

b.

What would be the price of Rivoli’s stock?

c.

What happens to the firm’s earnings per share

after the recapitalization?

d.

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

Determine

the times-interest-earned ratio for each probability. What is the probability

of not covering the interest payment at the 30 % debt level?