**Compute the return on equity after the company**

**increases its leverage**

Learn and Earn Company is financed entirely by Common

stock that is priced to offer a

20% expected return. The stock price is $60, the earnings per share

are $12 and

there are no corporate taxes. If the company repurchases 50% of the

stock and

substitutes it with an equal value of debt yielding 8%:

a) What is the expected

return on the common stock after refinancing? (4 points)

b) What is the expected

earnings per share value after refinancing? (4 points)

Q. Assume a company is fully financed by equity and has a

return on assets of 12%. The company is thinking of changing

its capital structure to 50% debt, which pays an interest

of 5%. Assume a tax rate of 35%.

a) What is the return on assets after the company

increases its leverage? (2 points)

b) Compute the return on equity after the company

increases its leverage (2 points)

c)What would the WACC be in absence of taxes after

the company increases its leverage? (2 points)

Finance – Delta Corporation

Delta Corporation earned $2.50 per share during fiscal year 2008

and paid cash dividends of $1.00 per share. During the fiscal year

that just ended on December 31, 2009, Delta earned $3.00 per share,

and the firm’s managers expect to earn this amount per share during

fiscal years 2010 and 2011, as well

a. what is delta’s payout ratio for fiscal year 2008?

b. if delta’s managers want to follow a constant nominal dividend

policy, what dividend per share will they declare for fiscal year

2009?

c. if Delta’s managers want to follow a constant payout ratio

dividend policy, what dividend per share will they declare for

fiscal year 2010?

d. if Delta’s managers want to follow a partial-adjustment

strategy, with a target payout ratio equal to FY 2008’s, how could

they change dividend payments during 2009, 2010, and 2011?

## Leave a Comment