Assignment 6

20 questions
1
point
1.
1. (5 points) Note: Questions 1 - 5 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Suppose YE is an all-equity firm with an EBIT of $27,000 per year that is expected to
stay the same for the foreseeable future. Your research shows that the beta equity
of YE is 1.50 and it has 10,000 shares outstanding. Suppose the expected return on
the market is 7% and the risk free rate is 3%. Assume the corporate tax rate is 25%.
The market value and price per share of YE are:

$225,000; $22.50

$250,000; $25.00

$112,500.50; $11.25

$200,000; $20
1
point
2.
2. (5 points) Note: Questions 1 - 5 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on

valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Suppose YE is an all-equity firm with an EBIT of $27,000 per year that is expected to
stay the same for the foreseeable future. Your research shows that the beta equity
of YE is 1.50 and it has 10,000 shares outstanding. YE has however recently issued
a bond yielding 4.50% with a market value of $120,000 and will use these funds to
buy back shares (a fairly common practice). YE also plans to retain $120,000 of debt
financing in perpetuity. Suppose the expected return on the market is 7% and the
risk free rate is 3%. How many shares will YE buy back? Assume the corporate tax
rate is 25% but the interest payments on debt are not tax deductible. (Enter a
number rounded to a whole number.)

Enter answer here

1
point
3.
3. (5 points) Note: Questions 1 - 5 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Suppose YE is an all-equity firm with an EBIT of $27,000 per year that is expected to
stay the same for the foreseeable future. Your research shows that the beta equity
of YE is 1.50 and it has 10,000 shares outstanding. YE has however recently issued
a bond yielding 4.50% with a market value of $120,000 and will use these funds to
buy back shares (a fairly common practice). YE also plans to retain $120,000 of debt
financing in perpetuity. Suppose the expected return on the market is 7% and the
risk free rate is 3%. What will YEs new return on equity be? Assume the tax rate is
25% but the interest payments on debt are not tax deductible. (No more than two
decimals in the percentage interest rate, but do not enter the % sign.)

Enter answer here

1
point

4.
4. (5 points) Note: Questions 1 - 5 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Suppose YE is an all-equity firm with an EBIT of $27,000 per year that is expected to
stay the same for the foreseeable future. Your research shows that the beta equity
of YE is 1.50 and it has 10,000 shares outstanding. YE has however recently issued
a bond yielding 4.50% with a market value of $120,000 and will use these funds to
buy back shares (a fairly common practice). YE also plans to retain $120,000 of debt
financing in perpetuity. Suppose the expected return on the market is 7% and the
risk free rate is 3%. What will YEs new beta of equity be? Assume the corporate tax
rate is 25% but the interest payments on debt are not tax deductible. (Enter a
number with no more than two decimals.)

Enter answer here

1
point
5.
5. (5 points) Note: Questions 1 - 5 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Suppose YE is an all-equity firm with an EBIT of $27,000 per year that is expected to
stay the same for the foreseeable future. Your research shows that the beta equity
of YE is 1.50 and it has 10,000 shares outstanding. YE has however recently issued
a bond yielding 4.50% with a market value of $120,000 and will use these funds to
buy back shares (a fairly common practice). YE also plans to retain $120,000 of debt
financing in perpetuity. Suppose the expected return on the market is 7% and the
risk free rate is 3%. What will YEs new price per share? Assume the corporate tax
rate is 25% but the interest payments on debt are not tax deductible. (Enter just the
number with up to two decimals but without the $ sign or a comma.)

Enter answer here

1
point
6.
6. (5 points) Note: Questions 6 - 10 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Your company is considering acquiring ABC, Inc., a software company. ABC, Inc. has
expected annual EBIT of $840,000 in perpetuity, and the appropriate discount rate
for the risk associated with the cash flow is 12%. ABC is an all-equity firm and has
700,000 shares outstanding. Assume the corporate tax rate is 25%. What is the
maximum amount that your company should offer to acquire (or purchase) ABC,
Inc.? (Enter just the number without the $ sign or a comma; round to the nearest
whole dollar.)

Enter answer here

1
point
7.
7. (5 points) Note: Questions 6-10 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Your company is considering acquiring ABC, Inc., a software company. ABC, Inc. has
expected annual EBIT of $840,000 in perpetuity, and the appropriate discount rate
for the risk associated with the cash flow is 12%. ABC is an all-equity firm and has
700,000 shares outstanding. What is the current price-earnings (or P/EPS) ratio of

ABC, Inc.? Assume the corporate tax rate is 25% but the interest payments on debt
are not tax deductible. (Enter the number with no more than two decimals.)

Enter answer here

1
point
8.
8. (5 points) Note: Questions 6-10 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Your company is considering acquiring ABC, Inc., a software company. ABC, Inc. has
expected annual EBIT of $840,000 in perpetuity, and the appropriate discount rate
for the risk associated with the cash flow is 12%. ABC is an all-equity firm and has
700,000 shares outstanding. The CEO of ABC, Inc. has a very exciting plan to make
her company look more attractive to your company. She suggests to her CFO that if
the firm issues $3.50M debt in perpetuity with a return of 8%, and uses this debt to
repurchase some of the shares of the company, it will make the firm more attractive
to acquirers. The CFO is skeptical of the CEOs plan and argues with her about the
logic behind it. Frustrated with her CFOs argumentative stance, the CEO finally
simply states: I do not have to convince you, Gautam, especially since my plan is
fool proof. My debt-based strategy will make our company attractive to any acquirer
because it will lower our price-earnings ratio and, consequently, make them offer us
a lot more money for our assets than they would otherwise. Assume that the
corporate tax rate is 25% but the interest payments on debt are not tax deductible.
Is the CEO correct in believing that the price-earnings ratio of ABC, Inc. will drop?

No

Yes

Maybe
1

point
9.
9. (5 points) Note: Questions 6-10 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Your company is considering acquiring ABC, Inc., a software company. ABC, Inc. has
expected annual EBIT of $840,000 in perpetuity, and the appropriate discount rate
for the risk associated with the cash flow is 12%. ABC is an all-equity firm and has
700,000 shares outstanding. The CEO of ABC, Inc. has a very exciting plan to make
her company look more attractive to your company. She suggests to her CFO that if
the firm issues $3.50M debt in perpetuity with a return of 8%, and uses this debt to
repurchase some of the shares of the company, it will make the firm more attractive
to acquirers. The CFO is skeptical of the CEOs plan and argues with her about the
logic behind it. Frustrated with her CFOs argumentative stance, the CEO finally
simply states: I do not have to convince you, Gautam, especially since my plan is
fool proof. My debt-based strategy will make our company attractive to any acquirer
because it will lower our price-earnings ratio and, consequently, make them offer us
a lot more money for our assets than they would otherwise. Assume the corporate
tax rate is 25% but the interest payments on debt are not tax deductible. What will
be the new P/E ratio of ABC, Inc. if it adopts this new debt-enhanced strategy?
(Enter the number with no more than two decimals.)

Enter answer here

1
point
10.
10. (5 points) Note: Questions 6 - 10 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Your company is considering acquiring ABC, Inc., a software company. ABC, Inc. has
expected annual EBIT of $840,000 in perpetuity, and the appropriate discount rate
for the risk associated with the cash flow is 12%. ABC is an all-equity firm and has
700,000 shares outstanding. The CEO of ABC, Inc. has a very exciting plan to make
her company look more attractive to your company. She suggests to her CFO that if
the firm issues $3.50M debt in perpetuity with a return of 8%, and uses this debt to
repurchase some of the shares of the company, it will make the firm more attractive
to acquirers. The CFO is skeptical of the CEOs plan and argues with her about the
logic behind it. Frustrated with her CFOs argumentative stance, the CEO finally
simply states: I do not have to convince you, Gautam, especially since my plan is
fool proof. My debt-based strategy will make our company attractive to any acquirer
because it will lower our price-earnings ratio and, consequently, make them offer us
a lot more money for our assets than they would otherwise. Assume the corporate
tax rate is 25% but interest payments on debt are not tax deductible. Is the CEO
correct in concluding that your company will pay more to acquire ABC, Inc.?

No

Maybe

Yes
1
point
11.
11. (5 points) Note: Questions 11 - 15 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Suppose YE is an all-equity firm with an EBIT of $27,000 per year that is expected to
stay the same for the foreseeable future. Your research shows that the beta equity
of YE is 1.50 and it has 10,000 shares outstanding. YE has however recently issued
a bond yielding 4.50% with a market value of $120,000 and will use these funds to
buy back shares (a fairly common practice). YE also plans to retain $120,000 of debt
financing in perpetuity. Suppose the expected return on the market is 7% and the
risk free rate is 3%. How many shares will YE buy back? Assume the corporate tax

rate is 25% and the interest payments on debt are tax deductible. (Enter just the
number; round to the nearest whole number.)

Enter answer here

1
point
12.
12. (5 points) Note: Questions 11 - 15 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Suppose YE is an all-equity firm with an EBIT of $27,000 per year that is expected to
stay the same for the foreseeable future. Your research shows that the beta equity
of YE is 1.50 and it has 10,000 shares outstanding. YE has however recently issued
a bond yielding 4.50% with a market value of $120,000 and will use these funds to
buy back shares (a fairly common practice). YE also plans to retain $120,000 of debt
financing in perpetuity. Suppose the expected return on the market is 7% and the
risk free rate is 3%. What will YEs new return on equity be? Assume the tax rate is
25% and the interest payments on debt are tax deductible. (No more than two
decimals in the percentage interest rate, but do not enter the % sign.)

Enter answer here

1
point
13.
13. (5 points) Note: Questions 11 - 15 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Suppose YE is an all-equity firm with an EBIT of $27,000 per year that is expected to
stay the same for the foreseeable future. Your research shows that the beta equity
of YE is 1.50 and it has 10,000 shares outstanding. YE has however recently issued
a bond yielding 4.50% with a market value of $120,000 and will use these funds to
buy back shares (a fairly common practice). YE also plans to retain $120,000 of debt
financing in perpetuity. Suppose the expected return on the market is 7% and the
risk free rate is 3%. What will YEs new beta of equity be? Assume the corporate tax
rate is 25% and the interest payments on debt are tax deductible. (Enter the
number with no more than two decimals.)

Enter answer here

1
point
14.
14. (5 points) Note: Questions 11 - 15 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Suppose YE is an all-equity firm with an EBIT of $27,000 per year that is expected to
stay the same for the foreseeable future. Your research shows that the beta equity
of YE is 1.50 and it has 10,000 shares outstanding. YE has however recently issued
a bond yielding 4.50% with a market value of $120,000 and will use these funds to
buy back shares (a fairly common practice). YE also plans to retain $120,000 of debt
financing in perpetuity. Suppose the expected return on the market is 7% and the
risk free rate is 3%. What will YEs new price per share? Assume the corporate tax
rate is 25% and the interest payments on debt are tax deductible. (Enter just the
number with up to two decimals but without the $ sign or a comma.)

Enter answer here

1
point
15.
15. (5 points) Note: Questions 11 - 15 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For

purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Suppose YE is an all-equity firm with an EBIT of $27,000 per year that is expected to
stay the same for the foreseeable future. Your research shows that the beta equity
of YE is 1.50 and it has 10,000 shares outstanding. YE has however recently issued
a bond yielding 4.50% with a market value of $120,000 and will use these funds to
buy back shares (a fairly common practice). YE also plans to retain $120,000 of debt
financing in perpetuity. Suppose the expected return on the market is 7% and the
risk free rate is 3%. What is YE's return on assets? Assume the corporate tax rate is
25% and the interest payments on debt are tax deductible. (No more than two
decimals in the percentage rate, but do not enter the % sign.)

Enter answer here

1
point
16.
16. (5 points) Note: Questions 16 - 20 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Your company is considering acquiring ABC, Inc., a software company. ABC, Inc. has
expected annual EBIT of $840,000 in perpetuity, and the appropriate discount rate
for the risk associated with the cash flow is 12%. ABC is an all-equity firm and has
700,000 shares outstanding. The CEO of ABC, Inc. has a very exciting plan to make
her company look more attractive to your company. She suggests to her CFO that if
the firm issues $3.50M debt in perpetuity with a return of 8%, and uses this debt to
repurchase some of the shares of the company, it will make the firm more attractive
to acquirers. The CFO is skeptical of the CEOs plan and argues with her about the
logic behind it. Frustrated with her CFOs argumentative stance, the CEO finally
simply states: I do not have to convince you, Gautam, especially since my plan is
fool proof. My debt-based strategy will make our company attractive to any acquirer
because it will lower our price-earnings ratio and, consequently, make them offer us
a lot more money for our assets than they would otherwise. Assume that the

corporate tax rate is 25% and the interest payments on debt are tax deductible. Is
the CEO correct in believing that the price-earnings ratio of ABC, Inc. will drop?

No

Yes

May be
1
point
17.
17. (5 points) Note: Questions 16 - 20 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Your company is considering acquiring ABC, Inc., a software company. ABC, Inc. has
expected annual EBIT of $840,000 in perpetuity, and the appropriate discount rate
for the risk associated with the cash flow is 12%. ABC is an all-equity firm and has
700,000 shares outstanding. The CEO of ABC, Inc. has a very exciting plan to make
her company look more attractive to your company. She suggests to her CFO that if
the firm issues $3.50M debt in perpetuity with a return of 8%, and uses this debt to
repurchase some of the shares of the company, it will make the firm more attractive
to acquirers. The CFO is skeptical of the CEOs plan and argues with her about the
logic behind it. Frustrated with her CFOs argumentative stance, the CEO finally
simply states: I do not have to convince you, Gautam, especially since my plan is
fool proof. My debt-based strategy will make our company attractive to any acquirer
because it will lower our price-earnings ratio and, consequently, make them offer us
a lot more money for our assets than they would otherwise. Assume the corporate
tax rate is 25% and the interest payments on debt are tax deductible. What will be
the new P/E ratio of ABC, Inc. if it adopts this new debt-enhanced strategy? (No
more than two decimals in the number.)

Enter answer here

1

point
18.
18. (5 points) Note: Questions 16 - 20 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Your company is considering acquiring ABC, Inc., a software company. ABC, Inc. has
expected annual EBIT of $840,000 in perpetuity, and the appropriate discount rate
for the risk associated with the cash flow is 12%. ABC is an all-equity firm and has
700,000 shares outstanding. The CEO of ABC, Inc. has a very exciting plan to make
her company look more attractive to your company. She suggests to her CFO that if
the firm issues $3.50M debt in perpetuity with a return of 8%, and uses this debt to
repurchase some of the shares of the company, it will make the firm more attractive
to acquirers. The CFO is skeptical of the CEOs plan and argues with her about the
logic behind it. Frustrated with her CFOs argumentative stance, the CEO finally
simply states: I do not have to convince you, Gautam, especially since my plan is
fool proof. My debt-based strategy will make our company attractive to any acquirer
because it will lower our price-earnings ratio and, consequently, make them offer us
a lot more money for our assets than they would otherwise. Assume the corporate
tax rate is 25% and interest payments on debt are tax deductible. Is the CEO correct
in concluding that your company will pay more to acquire ABC, Inc.?

No

May be

Yes
1
point
19.
19. (5 points) Note: Questions 16 - 20 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore

cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Your company is considering acquiring ABC, Inc., a software company. ABC, Inc. has
expected annual EBIT of $840,000 in perpetuity, and the appropriate discount rate
for the risk associated with the cash flow is 12%. ABC is an all-equity firm and has
700,000 shares outstanding. The CEO of ABC, Inc. has a very exciting plan to make
her company look more attractive to your company. She suggests to her CFO that if
the firm issues $3.50M debt in perpetuity with a return of 8%, and uses this debt to
repurchase some of the shares of the company, it will make the firm more attractive
to acquirers. The CFO is skeptical of the CEOs plan and argues with her about the
logic behind it. Frustrated with her CFOs argumentative stance, the CEO finally
simply states: I do not have to convince you, Gautam, especially since my plan is
fool proof. My debt-based strategy will make our company attractive to any acquirer
because it will lower our price-earnings ratio and, consequently, make them offer us
a lot more money for our assets than they would otherwise. Assume the corporate
tax rate is 25% and interest payments on debt are tax deductible. What is the new
enterprise value of ABC, Inc. if the CEO's plan is executed? (Enter just the number
without the $ sign or a comma; round to the nearest whole dollar.)

Enter answer here

1
point
20.
20. (5 points) Note: Questions 16 - 20 relate to the same "mega" problem. For
convenience we have included the entire set of information in every question. For
purposes of the questions that follow, assume that changes in working capital are
negligible and capex and depreciation are of the same magnitude and therefore
cancel each other. This is the assumption we made in most of the videos to focus on
valuation effects of borrowing and taxes and to figure out the key differences
between alternative valuation methods.

Your company is considering acquiring ABC, Inc., a software company. ABC, Inc. has
expected annual EBIT of $840,000 in perpetuity, and the appropriate discount rate
for the risk associated with the cash flow is 12%. ABC is an all-equity firm and has
700,000 shares outstanding. The CEO of ABC, Inc. has a very exciting plan to make
her company look more attractive to your company. She suggests to her CFO that if
the firm issues $3.50M debt in perpetuity with a return of 8%, and uses this debt to
repurchase some of the shares of the company, it will make the firm more attractive
to acquirers. The CFO is skeptical of the CEOs plan and argues with her about the

logic behind it. Frustrated with her CFOs argumentative stance, the CEO finally
simply states: I do not have to convince you, Gautam, especially since my plan is
fool proof. My debt-based strategy will make our company attractive to any acquirer
because it will lower our price-earnings ratio and, consequently, make them offer us
a lot more money for our assets than they would otherwise. Assume the corporate
tax rate is 25% and the interest payments on debt are tax deductible. What is the
return on equity of ABC, Inc. if the CEO's plan is executed? (No more than two
decimals in the percentage rate, but do not enter the % sign.)