Different loan rates. Winthrop Enterprises is a holding company (a firm that owns all or most of some other companies’ outstanding stock). Winthrop has four subsidiaries. Each subsidiary borrows capital from the parent company for projects. Ervin Company is successful with its projects 85% of the time, Morten Company 92% of the time, Richmond Company 78% of the time,Garfield Company 83% of the time. What loan rates should Winthrop Enterprises charge each subsidiary for loans?
Different loan rates. Jerry Mathers is the CFO of Springfield Soups and Sauces. The company’s typical success rate for new products is 88%. Jerry wants to improve this success rate to 94%. What loan improvement (in terms of rates) would do that for Springfield Soups and Sauces?
Benefits of borrowing. Wilson Motors is looking to expand its operations by adding a second manufacturing location. If successful, the company will make $450,000; if it fails, the company will lose $250,000. Wilson Motors is trying to decide if it should borrow the $250,000, given the current bank loan rate of 15%. Should Wilson Motors borrow the money if
a. the probability of success is 90%?
b. the probability of success is 80%?
c. the probability of success is 70%?
4. Benefits of borrowing. What is the breakeven probability of success at the 15% borrowing rate in Problem 3? What is the breakeven probability of success if the loan rate is 20%?
Breakeven EBIT (with and without taxes). Alpha Company is looking at two different capital structures, one an allequity firm and the other a leveraged firm with $2,000,000 of debt financing at 8% interest. The allequity firm will have a value of $4,000,000 and 400,000 shares outstanding. The leveraged firm will have 200,000 shares outstanding. a. Find the breakeven EBIT for Alpha Company using EPS if there are no corporate taxes.
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