Once Bitten Corp. applies no debt. The weighted average cost of capital is 9.5 percent. If the current market value of the equity is $20.4 million and there are no taxes, what is EBIT?

The IPO investment bank has the following financing outstanding:

Debt: 60,000 bonds with a coupon rate of 9% and a current price quote of $109.5; the bonds have 20 years to maturity,$230,000-zero coupon bonds with a price-quote of $20.5, and 30 years until maturity, both bonds have a par value of$1,000 and semi-annual coupons.

Preferred Stock: 150,000 shares of 7% preferred stock with a current price of $76 and a par value of$100.

Common Stock: 2,600,000 shares of common stock, the current price is $62, and the beta of the stock is 1.35.

Market: The corporate tax rate is 25%, the market risk premium is 5%, and the risk-free rate is 2%.

What is the WACC for the company?

Shanken Corp. issued a 30-year, 6.2 percent semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent.
a. What is the pretax cost of debt?
b. What is the aftertax cost of debt?
c. Which is more relevant, the pretax or the aftertax cost of debt? Why?

Jiminy’s Cricket Farm issued a 30-year, 7% semiannual bond 3 years ago.The bond currently sells for 93% of its face value. The company’s tax rate is 35%.

a. What is the pretax cost of debt?
b. What is the aftertax cost of debt?
c. Which is more relevant, the pretax or the aftertax cost of debt? Why?

Fyre, Inc., has a target debt−equity ratio of .85. Its WACC is 9.9%, and the tax rate is 35%.

a. If the company’s cost of equity is 14%, what is its pretax cost of debt?
b. If instead you know that the aftertax cost of debt is 6.8%, what is the cost of equity?

Rewrite the following sentences, correcting errors in the standard, formal use of abbreviations.

EXAMPLE:The next stop for the train is Cincinnati, $\mathrm{OH}$. Cincinnati, Ohio.

I'll be there at 7:00 A.M.

Go to the website www.cedarfair.com and click on “Investors,” then “Investor Information,” “Financial Reports,” and “Annual Reports.” Then click on “2017 Annual Report on 10-K” to access the 2017 Form 10-K annual report for Cedar Fair, L.P.
 Review the financial statements and the accompanying notes contained in the 2017 annual report, especially any that discuss the partnership form of organization.
 Assume that an investor is considering investing in this partnership and has downloaded this report for analysis.

Required
Briefly describe Cedar Fair’s business and major properties.

Amie, Inc., has 100,000 shares of $2 par value stock outstanding. Prairie Corporation obtained 30,000 of Amie’s shares on January 1, 2018, for$120,000 when Amie’s net assets had a total fair value of $350,000. On July 1, 2021, Prairie bought an additional 60,000 shares of Amie from a single stockholder for$6 per share. Although Amie’s shares were selling in the $5 range around July 1, 2021, Prairie forecasted that obtaining control of Amie would produce significant revenue synergies to justify the premium price paid. If Amie’s identifiable net assets had a fair value of$500,000 at July 1, 2021, how much goodwill should Prairie report in its postcombination consolidated balance sheet?

a. $60,000
b.$90,000
c. $100,000 *d.*$–0–

Arnett Company was started in 2016 when it acquired $30,000 cash by issuing common stock to Dan Arnett.

Required

Was this event an asset source, use, or exchange transaction for Arnett Company?

Chapman Company acquires 100% of Abernethy Company’s stock on January 1, 2020. As of that date, Abernethy has the following trial balance:

During 2020, Abernethy reported net income of $80,000 while declaring and paying dividends of$10,000. During 2021, Abernethy reported net income of $110,000 while declaring and paying dividends of$30,000.

Assume that Chapman Company acquired Abernethy’s common stock by paying $520,000 in cash.All of Abernethy’s accounts are estimated to have a fair value approximately equal to present book values. Chapman uses the partial equity method to account for its investment. Prepare the consolidation worksheet entries for December 31, 2020, and December 31, 2021.

Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management. Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 9 million shares of common stock outstanding. The stock currently trades at $37.80 per share.

 Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for$95 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson’s annual pretax earnings by $18.75 million in perpetuity. Jennifer Weyand, the company’s new CFO, has been put in charge of the project. Jennifer has determined that the company’s current cost of capital is 10.2%. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a 6% coupon rate. From her analysis, she also believes that a capital structure in the range of 70% equity/30% debt would be optimal. If the company goes beyond 30% debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 40% corporate tax rate (state and federal).

QUESTION

If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.

Mayan Playhouse is a nonprofit entertainment organization. They wi sh to network their existing 18 desktop compu ter systems . The company that offers them the best price will charge $27,120 for a file server,$4,259 for a network printer, $2,218 for the other hardware, and$2,4 88 to install the network .

What is the cost of the network per desktop computer?

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $5,400,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for$1,610,000 per year for four years.

What would the lease payment have to be for both lessor and lessee to be indifferent about the lease?

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $5,400,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for$1,610,000 per year for four years.

What is the NAL of the lease from the lessor’s viewpoint? Use a 35% tax bracket.