1. What is the yield curve and why would it be important to banks?
Lexington Company is an unlevered firm with a total market value of $32,820,000 with 1,000,000 shares of stock outstanding. The firm has expected EBIT of $2,130,000 if the economy is normal and $2,756,000 if the economy booms. The firm is considering a $6,000,000 bond issue with an attached interest rate of 5.9 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy booms?
$2.34
$2.50
$2.72
$2.94
$3.12
3. Galaxy Communications has a cost of equity of 10.60 percent and a pretax cost of debt of 7.3 percent. The debt-equity ratio is .55 and the tax rate is 34 percent. What is the unlevered cost of capital?
8.83%
9.02%
9.47%
9.72%
9.98%