FIN 571 Week 5 Problems

Chapter 17

B4.

(Coverage ratios) Mi Furst, Inc., has $100 million of earnings before interest and taxes and $40 million of interest expense.

1. Calculate Mi Furst’s interest coverage ratio.

2. Calculate the pro forma interest coverage ratio assuming the issuance of $100 million of 10% debt with the issue proceeds to be invested fully in a plant under construction.

3. Calculate the pro forma interest coverage ratio assuming the issuance of $100 million of 10% debt with the proceeds to be invested temporarily in commercial paper that yields 8%.

Chapter 18

A6

(Market prices following a stock split or stock dividend) Assume that IBM is selling for $180 per share. IBM implements one of the following stock dividends or stock splits, and no other change

in the value of the firm occurs. What is the value of one share for each of the following?

1.    
An 8% stock dividend

2.    
A 50% stock dividend

3.    
A 3-for-2 stock split

4.    
A 2-for-1 stock split

Chapter 20

A8

(Domestic versus Eurobond borrowing costs) A firm can issue an eight-year public debt issue at par with an 11% coupon in the domestic market. It can also issue 11.25% Eurobonds. If all other expenses are equal, which issue offers the firm the lower borrowing cost?