Question Details

What would be the company- earnings per share



Financial analysts for Naulls Industries have revealed the following information about the company:

•	Naulls Industries currently has a capital structure that consists of 75 percent common equity and 25 percent debt.
•	The risk-free rate, kRF, is 5 percent.
•	The market risk premium , kM - kRF, is 6 percent.
•	Naulls- common stock has a beta of 1.2.
•	Naulls has 20-year bonds outstanding with an annual coupon rate of 12 percent and a face value of $1,000.  The bonds sell today for $1,200.
•	The company- tax rate is 40 percent.

 .	What is the company- unlevered beta?

a.	0.43
b.	0.93
c.	1.00
d.	1.06
e.	1.44

 .	What would be the company- new cost of common equity (using the CAPM) if it were to change its capital structure to 40 percent debt and 60 percent common equity?  (Note:  Here we are asking for the new cost of common equity, not the WACC!)

a.	11.36%
b.	12.62%
c.	13.40%
d.	14.30%
e.	16.40%

(The following information applies to the next four problems.)

Stewart Inc. has $4,000,000 in total assets.  The company- current capital structure consists of 25 percent debt and 75 percent common equity.  Currently, the company- before-tax cost of debt is 8 percent.  The risk-free rate (kRF) is 
5 percent and the market risk premium (kM - kRF) is also 5 percent.  At the firm- current capital structure, the company- beta is 1.15 (i.e., its current cost of common equity is 10.75 percent).  Stewart- operating income (EBIT) is $300,000, its interest expense is $80,000, and its tax rate is 40 percent.  The company has 80,000 outstanding shares of common stock.  The company- net income is currently $132,000, and its earnings per share (EPS) is $1.65.  The company pays out all of its earnings as dividends (EPS = DPS), and hence its growth rate is zero.  Thus, its stock price is simply EPS/ks; where ks is the cost of common equity.  It follows that the company- stock price is currently $15.3488 ($1.65/0.1075).

 
 .	What is the company- WACC?

a.	 6.29%
b.	 8.86%
c.	 9.26%
d.	10.06%
e.	10.70%

 .	What is the company- unlevered beta?

a.	0.4107
b.	0.9583
c.	1.0000
d.	1.0147
e.	1.3800

 .	The company is considering changing its capital structure.  Specifically, the firm is considering a capital structure that consists of 50 percent debt and 50 percent common equity.  In order to make this change, the company would issue additional debt and use the proceeds to repurchase common stock.  Assume that if the firm adopts this change, its total interest expense would now be $200,000.  Assume that the capital structure change would have no effect on the company- total assets, operating income, or tax rate.  Assume that all common shares will be repurchased at $16 a share, which is slightly above the current stock price of $15.3488.  What would be the company- new cost of common equity if it adopts a capital structure that consists of 50 percent debt and 50 percent common equity?

a.	11.23%
b.	11.71%
c.	12.25%
d.	12.67%
e.	13.00%

 .	What would be the company- earnings per share, if it adopts a capital structure with 50 percent debt and 50 percent common equity?

a.	$0.75
b.	$2.46
c.	$3.43
d.	$4.04
e.	$6.86



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