Blaine Capital Structure Case - Prajwal Kumar

A common problem facing any business entity is the debt versus equity decision. When funds are required toobtain assets, should debt or equity financing be used? This decision also is faced when a company is initiallyformed. What will be the mix of debt versus equity in the initial capital structure? The characteristics of debt arevery different from those of equity as are the financial implications of using one method of financing as opposedto the other.Cherokee Plastics Corporation is formed by a group of investors to manufacture household plastic products.Their initial capitalization goal is $50,000,000. That is, the incorporators have decided to raise $50,000,000 toacquire the initial assets of the company. They have narrowed down the financing mix alternatives to two:1. All equity financing2. $20,000,000 in debt financing and $30,000,000 in equity financingNo matter which financing alternative is chosen, the corporation expects to be able to generate a 10% annualreturn, before…

A common problem facing any business entity is the debt versus equity decision. When funds are required to obtain assets, should debt or equity financing be used? This decision also is faced when a company is initially formed. What will be the mix of debt versus equity in the initial capital structure? The characteristics of debt are very different from those of equity as are the financial implications of using one method of financing as opposed to the other.Cherokee Plastics Corporation is formed by a group of investors to manufacture household plastic products. Their initial capitalization goal is $50,000,000. That is, the incorporators have decided to raise $50,000,000 to acquire the initial assets of the company. They have narrowed down the financing mix alternatives to two: All equity financing $20,000,000 in debt financing and $30,000,000 in equity financing No matter which financing alternative is chosen, the corporation expects to be able to generate a 10% annual return,…

A company uses a financial instrument for bridge financing. The instrument here is short term, low risk, unsecured and highly liquid. It needed to buy machinery for which it issued equity. This turned out to be expensive as this issue involved floatation costs. The company is large and has good creditworthy and this method has come up as a great help to it. Based on the above case study, answer the following: Which financial instrument is indicated in the above case? Which type of instrument is this? Name the types of floatation costs which are generally involved? How has this method helped the company? Name 2 money market instruments which are issued at discount and redeemed at par.

A common problem facing any business entity is the debt versus equity decision. When funds are required to obtain assets, should debt or equity financing be used? This decision also is faced when a company is initially formed. What will be the mix of debt versus equity in the initial capital structure? The characteristics of debt are very different from those of equity as are the financial implication of using one method of financing as opposed to the other. Cherokee Plastics Corporation is formed by a group of investors to manufacture household plastic products. Their initial capitalization goal is $50,000,000. That is, the incorporators have decided to raise $50,000,000 to acquire the initial assets of the company. They have narrowed down the financing mix alternatives to two: All equity financing $20,000,000 in debt financing and $30,000,000 in equity financing No matter which financing alternative is chosen, the corporation expects to be able to generate a 10% annual return, before…

Assume a Modigliani and Miller economy. Company XYZ is currently financed only withequity. The management of the company hires a consultant. The consultant makes thefollowing suggestion: “My advice for XYZ is to issue debt and use it to repurchase some ofthe company’s equity. This would allow XYZ to get the benefit of a low cost of capital ofdebt without raising its cost of capital of equity.”Discuss in detail the statement of the consultant.

1.There are two significant benefits of obtaining a loan over investing capital:a. the money does not have to be repaid, and lenders usually take an active interest in their creditorsb. the investment does not have to be repaid, and no ownership of the company is surrenderedc. no ownership of the company is given up or surrendered, and interest payments are tax deductibled. banks are dependable providers of venture funding, and interest charges are tax deductible2.A _________ aims to improve a good or service's revenue by increasing marketing activities or increasing production ability and performance.a. product line extension strategyb. geographic expansion strategyc. market penetration strategyd. strategic alliance strategy3.Entrepreneurs should be aware of three issues about business growth. What are the issues?a. a business's valuation increases with its growth, a business can grow too fast, and business growth is a top priority of most entrepreneurial firmsb. not all businesses…

Please answer this question and explain. Thank you

6. Backroads Sporting Goods is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. To estimate how much its debt would cost at different debt levels, the company's treasury staff has consulted with investment bankers and, on the basis of those cussions, has created the following table: 4 Debt-to-Capital Ratio 0.0 0.2 0.4 0.6 a 9.56% h 10.48% Equity-to- Capital Ratio 11.13% d. 11.45% e. 12.25 % (w.) 1.0 0.8 0.6 0.4 0.2 Debt-to-Equity Ratio (D/E) 0.00 0.25 0.67 1.50 4.00 Bond Rating A BBB BB Before-Tax Cost of Debt 65% 7.5 9.5 D Backroads uses the CAPM to estimate its cost of common equity. r.. The company estimates that the risk-free rate is 6%, the market risk premium is 5%, and its tax rate is 40%. Backroads estimates that if it had no debt, its "unlevered" beta, bu, would be 1.25. On the basis of this information,…

15.In a world with corporate taxes, the market value of a firm’s assets can increase through the introduction of debt into the firm’s capital structure.In no more than 6 lines, comment on this statement. 16.The empirical evidence concerning financing decisions made by firms supports the idea that financing decisions are made randomly by firms with no real impact on firm value. In no more than 6 lines, comment on this statement.

The MM irrelevance capital structure theory proved that a firm’s value is unaffected by its capital structure.But their study was based on all of the following strong assumptions excluding:     a. There are no brokerage costs.     b. There are no corporate taxes and personal taxes.     c. There are bankruptcy costs and agency costs.     d. There is no asymmetric information problem, and all investors can borrow at the same rate as corporations.

Which of the following statements is CORRECT? * Assume a corporation has less debt than what is ideal. Increasing the use of debt to reach its optimum capital structure would lower the cost of both debt and equity financing. There is no reason to believe that changes in the personal tax rate will have an effect on firms' capital structure decisions. Assuming everything else is equal, a firm with high business risk is more likely to increase the use of financial leverage than a firm with low business risk. In general, a company with low operating leverage has a small percentage of its total costs in the form of fixed costs. If a company's after-tax cost of equity exceeds its after-tax cost of debt, it can still lower its WACC by using more debt.

Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt-to-ValueRatio(wd) Market Equity-to-ValueRatio(ws) Market Debt-to-EquityRatio(D/S) Before-Tax Cost of Debt (rd) 0.0 1.0 0.00 6.0%   0.2 0.8 0.25 7.0     0.4 0.6 0.67* 8.0     0.6 0.4 1.50 9.0     0.8 0.2 4.00 10.0     * Use the exact value of 2/3 in your calculations. F. Pierce uses the CAPM to estimate its cost of common equity, rs and at the time of the analaysis the risk-free rate is 6%, the market risk premium is 5%, and the company's tax rate is 40%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 1.25. Based on this information, what is the firm's optimal capital…

Which of the following statement is INCORRECT?   Question 20 options:   1)  The finance manager manages the short-term balance sheet items of the company, such as current assets and current liabilities.   2)  The finance manager uses investment evaluation techniques to decide whether to purchase fixed assets.   3)  The finance manager seeks to maximise the firm’s wealth when deciding on the choice of capital sources such as debts and equity.   4)  The right-hand side of the balance sheet refers to the company’s investment decisions to buy fixed assets to generate returns.

Which of the following statements is true? a. High liquidity means a company is short on cash and may be unable to pay its debts.b. When a company decides to go public through an IPO, it is typically targeting to sell its shares to only a handful of shareholders. c. If the company has a higher than expected extremely high profit this year, equity holders will benefit more than debt holders as debtholders are the residual claimers for the cash flows of the company.d. In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy.e. Equity holders expect to receive dividends and the firm is always legally obligated to pay them.

Which of the following statements is FALSE? As debt increases, the risk associated with bankruptcy and agency costs is reduced.   Debt is often the least costly form of financing for a firm. Firms should probably use some debt in their capital structure. Different firms are subject to different levels of risk.

. The relationship between a firm's capital structure and other company attributes As a firm takes on more debt, its probability of bankruptcy    . Other factors held constant, a firm whose earnings are relatively volatile faces a    chance of bankruptcy. Therefore, when other factors are held constant, a firm whose earnings are relatively volatile should use    debt than a more stable firm. When bankruptcy costs become more important, they    the tax benefits of debt.   Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm’s unlevered beta is 1.15, and its cost of equity is 11.55%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 11.55%. The risk-free rate of interest (rRFrRF) is 3.5%, and the market risk premium (RPMRPM) is 7%. Blue Ram’s marginal tax rate is 25%. Blue Ram is examining how different levels of…

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Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company. Changes in consumer demand have made it hard for Ross to attract customers Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term-a current asset. On the controller’s recommendation,…