KL Inc., has no debt outstanding and a total market value of $70,000. Earnings before interest and taxes, EBIT, are projected to be $6,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 40 percent lower. KL is considering a $35,000 debt issue with 6% annual interest rate. The proceeds will be used to repurchase shares of stock. There are currently 3,500 shares outstanding. The current KL’s tax rate is 35 percent. a. Compute EPS & ROE, under each economic condition, before and after debt issued. b. Compute the indifferent EBIT & EPS between the current and the proposed capital 2. CD & Co. (CDC) can borrow capital at 9 percent. CDC currently has no debt, and the cost of equity is 16 percent. The current market value of the firm is $540,000. What will the value be if CDC borrows $110,000 permanently and uses the proceeds to repurchase shares? The firm’s corporate tax rate is 35 percent. 3. LNT Corp. borrows $10 million by issuing a 20-year bond with 10% annual coupon at par. If the firm's tax rate is 35%, what is the estimated PVTS from this debt?

1.     KL Inc., has no debt outstanding and a total market value of $70,000. Earnings before interest and taxes, EBIT, are projected to be $6,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 40 percent lower. KL is considering a $35,000 debt issue with 6% annual interest rate. The proceeds will be used to repurchase shares of stock. There are currently 3,500 shares outstanding. The current KL’s tax rate is 35 percent. 

 

a.      Compute EPS & ROE, under each economic condition, before and after debt issued.

b.     Compute the indifferent EBIT & EPS between the current and the proposed capital

 

2.     CD & Co. (CDC) can borrow capital at 9 percent. CDC currently has no debt, and the cost of equity is 16 percent. The current market value of the firm is $540,000. What will the value be if CDC borrows $110,000 permanently and uses the proceeds to repurchase shares? The firm’s corporate tax rate is 35 percent.

 

3.     LNT Corp. borrows $10 million by issuing a 20-year bond with 10% annual coupon at par. If the firm's tax rate is 35%, what is the estimated PVTS from this debt?

 

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