Company P is a regional pizza restaurant chain. The given details are as follows, EBIT is $120 million, Tax rate is 25%, Risk-free rate of return is 6%, Market risk premium is 6%, Outstanding shares 10 million. As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock. To determine: Differences between business risk and financial risk.

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Answer 1

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Chapter 15, Problem 3MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To determine: Differences between business risk and financial risk.

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Answer 2

Question

Chapter 15, Problem 3MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To determine: Differences between business risk and financial risk.

Expert Solution & Answer

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Answer 3

Question

Chapter 15, Problem 3MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To determine: Differences between business risk and financial risk.

Expert Solution & Answer

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Answer 4

Question

Chapter 15, Problem 3MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To determine: Differences between business risk and financial risk.

Expert Solution & Answer

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Answer 5

Chapter 15, Problem 3MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To determine: Differences between business risk and financial risk.

Answer 6

Chapter 15, Problem 3MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To determine: Differences between business risk and financial risk.

Answer 7

Chapter 15, Problem 3MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To determine: Differences between business risk and financial risk.

Answer 8

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Answer 9

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Answer 10

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Answer 11

Ch. 15 - Prob. 1Q Ch. 15 - What term refers to the uncertainty inherent in...Ch. 15 - Firms with relatively high nonfinancial fixed...Ch. 15 - “One type of leverage affects both EBIT and EPS....Ch. 15 - Why is the following statement true? Other things...Ch. 15 - Why do public utility companies usually have...Ch. 15 - Why is EBIT generally considered to be independent...Ch. 15 - If a firm went from zero debt to successively...Ch. 15 - Prob. 9Q Ch. 15 - Prob. 1P

Solution Summary: The author explains the difference between business risk and financial risk. Business risk is nothing but the uncertainties about Earnings before interest and tax (EBIT).

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Chapter 15 Solutions