I did this problem and all of its correct besides number 4. Can you please help

Question

I did this problem and all of its correct besides number 4. Can you please help me get the correct number 4?

The Rivoli Company has no debt outstanding, and its financial position is given by the following data:

The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 25% debt based on market values, its cost of equity, rs, will increase to 11% to reflect the increased risk. Bonds can be sold at a cost, rd, of 8%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.

1.) What effect would this use of leverage have on the value of the firm?
-Select One:
I. Increasing the financial leverage by adding debt has no effect on the firm's value.
II. Increasing the financial leverage by adding debt results in an increase in the firm's value.
III. Increasing the financial leverage by adding debt results in a decrease in the firm's value.

2) What would be the price of Rivoli's stock? Round your answer to the nearest cent.
_____$   per share?

3) What happens to the firm's earnings per share after the recapitalization? Round your answer to the nearest cent. The firm will increse or decrease(select one)________? its EPS by $ ________?

The $500,000 EBIT given previously is actually the expected value from the following probability distribution:

4) Determine the times-interest-earned ratio for each probability. Round your answers to two decimal places.

5) What is the probability of not covering the interest payment at the 25 percent debt level? Round your answer to two decimal places.

____ %.?

1.) What effect would this use of leverage have on the value of the firm?
-Select One:

II. Increasing the financial leverage by adding debt results in an increase in the firm's value.

Note : Due to Tax Saving on Debt

2) What would be the price of Rivoli's stock? Round your answer to the nearest cent.

Value of Debt = 25%*3000000 = 750000

No of outstanding Share of Equity = 200000 - 750000/15 = 150000

EPS = (EBIT - Interest)*(1-tax rate)/No of new outstanding Share

EPS = (500000 - 750000*8%)*(1-40%)/150000

EPS = $ 1.76

Dividend = EPS *(1-retention ratio%)

Dividend = 1.76*(1-0%)

Dividend = 1.76

Share Price = Dividend /Cost of Equity

Share Price = 1.76/11%

Share Price = $ 16

$ 16 per share

3) What happens to the firm's earnings per share after the recapitalization? Round your answer to the nearest cent. The firm will increse or decrease(select one)________? its EPS by $ ________?
Previous EPS = 500000*(1-40%)/200000

Previous EPS = 1.50

Expected EPS = 1.76

The firm will increse its EPS by (1.76-1.50)

The firm will increse its EPS by $ 0.26

The $500,000 EBIT given previously is actually the expected value from the following probability distribution:

4) Determine the times-interest-earned ratio for each probability. Round your answers to two decimal places.

Interest Expenses = 750000*8% = 60000

TIE = EBIT/Interest Expenses

The TIE answers are wrong it's saying? Please help me correct this.

5) What is the probability of not covering the interest payment at the 25 percent debt level? Round your answer to two decimal places.

_10___ %.

Assets (Market value = book value) $3,000,000 EBIT $500,000 Cost of equity, rs 10% Stock price, Po $15 Shares outstanding, no 200,000 Tax rate, T (federal-plus-state) 40%

Explanation / Answer

Solution:

I hope this may solve the purpose.

Thank you.

Interest Coverage Ratio = EBIT / Interest Expenses Interest Coverage Ratio = 8.33 Probabilty TIE = Probabilty * Interest coverage Ratio 0.10 0.83 0.20 1.67 0.40 3.33 0.20 1.67 0.10 0.83

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