finance homework assignment

| November 28, 2016

Question
1. Use the following information to answer questions A through G.
Market Values
Current cap. Structure
Proposed cap. Structure
Assets
$15 million
$15 million
Debt
$0
$6 million
Equity
$15 million
$9 million
Share price
$25.00
$22.50
Shares outstanding 600,000
???
Bond Interest rate
N/A
8%
There are no taxes. EBIT is expected to be $2.5 million, but could be as high as $3.5 million if
an economic expansion occurs, or as low as $2 million if a recession occurs. All values are
market values.
A. What are EPS under the current and proposed capital structure for the three state of
economy?
B. What are ROE under the current and proposed capital structure for the three state of
economy?
C. How many shares are outstanding under the proposed capital structure?
D. What is the weighted average cost of capital before and after recapitalization?
E. What are EPS and ROE if the tax rate is 40%?
F. What is the WACC if the tax rate is 40%?
G. What is the expected net income and levered value of the firm when the tax rate is 40%?
2. As manager of operation at the First California Bank (FCB), Vince Carter is responsible to
reduce operational costs, keep FCB competitive with other banks such as First National Bank, and provide the best customer service to the FCB’s customers.
Four years ago, he installed an automated teller machine (ATM) at one of its branches.
The machine had the capacity to accept deposits, make withdrawals, and handle inquiries
regarding account balances. Not long afterward, National Bank of California, NBC, installed
its own superior and reliable ATM and called it MoneyMax ATM. MoneyMax can do
everything the FCN’s ATM can do, and more, including transferring customers’ funds between
checking and savings, card retraction, receipt printing, customer service requests, dot-matrix
Journal printing or electronic journal and any online banking that a computer could do.
Since the NBC installed its MoneyMax, FCB has lost many of its customers. As a
result, Vince Carter is planning to install a new, more efficient and productive ATM called
Transax Mini-Bank, because it will handle complete banking activities outside of the bank.
When FCB purchased its first ATM, it cost $500,000 and was estimated to have a useful
economic life of 10 years. The bank has been depreciating its ATM on a straight -line basis
(over 10 years) to an estimated book salvage value of $100,000. The current actual market
value of the old ATM is $200,000.
Transax Mini-Bank will cost $800,000 and have an expected economic life of 6 years.
FCB plans to depreciate the new ATM over 5 years using MACRS. FCB believes that its
Transax Mini-Bank will attract new customers, which are expected to generate $300,000 in
new revenues during the first year. Revenues from these new customers are expected to grow
at 5% per year over the 6-year life of the Transax ATM. Vince Carter also estimated the

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