Solved

The Cripple Creek Railway Is Currently All Equity Financed,but It

Question 46

Multiple Choice

The Cripple Creek Railway is currently all equity financed,but it is considering a leveraged capital structure.Selected financial information for Cripple Creek is provided in the table below.Assume that Cripple Creek generates perpetual annual EBIT at a constant level.Assume that all cash flows occur at the end of the year and we are currently at the beginning of a year.Assume that taxes are zero.Assume that all of net income is paid out as a dividend.Assume that the debt is perpetual with an annual coupon rate of 4% (and yield of 4%) .Assume that individual investors can borrow and lend at the same interest rate (and with the same terms) as corporations.
Under the proposed levered capital structure,Cripple Creek will use all of the new debt to repurchase (and cancel) shares.
Bill Strong,a brakeman for the railway,bought 100 shares of Cripple Creek at $60.Bill receives annual dividend income of $300.Bill likes the return on investment that he could earn under the proposed levered capital structure,but Cripple Creek has announced that it will not go forward with the change in capital structure.If Bill borrows $2,000 and buys shares,then what is his return on investment?
The Cripple Creek Railway is currently all equity financed,but it is considering a leveraged capital structure.Selected financial information for Cripple Creek is provided in the table below.Assume that Cripple Creek generates perpetual annual EBIT at a constant level.Assume that all cash flows occur at the end of the year and we are currently at the beginning of a year.Assume that taxes are zero.Assume that all of net income is paid out as a dividend.Assume that the debt is perpetual with an annual coupon rate of 4% (and yield of 4%) .Assume that individual investors can borrow and lend at the same interest rate (and with the same terms) as corporations. Under the proposed levered capital structure,Cripple Creek will use all of the new debt to repurchase (and cancel) shares. Bill Strong,a brakeman for the railway,bought 100 shares of Cripple Creek at $60.Bill receives annual dividend income of $300.Bill likes the return on investment that he could earn under the proposed levered capital structure,but Cripple Creek has announced that it will not go forward with the change in capital structure.If Bill borrows $2,000 and buys shares,then what is his return on investment?   A)  5.00% B)  5.15% C)  5.33% D)  5.50% E)  5.67%


A) 5.00%
B) 5.15%
C) 5.33%
D) 5.50%
E) 5.67%

Correct Answer:

verifed

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Related Questions

Unlock this Answer For Free Now!

View this answer and more for free by performing one of the following actions

qr-code

Scan the QR code to install the App and get 2 free unlocks

upload documents

Unlock quizzes for free by uploading documents