Lil John Industries’ equity is currently selling for $54 per share and there are 3.6 million shares outstanding. The firm also has 44,000 bonds outstanding, which are selling at 104 percent of par. Suppose that Lil John is considering an active change to its capital structure so that the firm would have a D/E of 1.6.

Required:

Which type of security (stocks or bonds) would Lil John need to sell to accomplish this, and how much would it have to sell

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GTB, Inc., has a 32 percent tax rate and has $102 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 on 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 .36 .64

Expect EBIT in state $5.70 million $16.80 million

The firm is considering switching to a 37 percent debt capital structure and has determined that they would have to pay a 10 percent yield on perpetual debt in either event.

Required:

What will be the break-even level of EBIT?

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MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.2, all future dividends are expect to grow at a rate of 5 percent per year, and the firm faces a required rate of return on equity of 17 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $34.0 per share that is not expected to affect any other future dividends.

Required:

What should the stock price be?