12-10. (Assessing leverage use) Financial data for three corporations are displayed here.MEASUREFIRM AFIRM BFIRM CINDUSTRY NORMDebt ratio21%21%24%10.2 times11.3 times39%Times interest earned7.5 times7.0 times9.1 timesPrice/earnings ratio9.2 times6.4 times10.0 timesa. Which firm appears to be excessively leveraged?b. Which firm appears to be employing financial leverage to the most appropri-ate degree?c. What explanation can you provide for the higher price/earnings ratio enjoyedby firm B as compared to firm A?

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Answered: 12-10. (Assessing leverage use)…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter12: Capital Structure

Section: Chapter Questions

Problem 9PROB

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As an Analyst you were tasked to compute for the Weighted Average Cost of Capital of variouscompanies given the following information. Income tax rate is 25% a. What is the cost of equity of each companies?b. What is the after tax cost of debt of each companies?c. What is the WACC of each companies? W Corp A Corp Co. Corp Ca Corp Risk Free rate 4.00% 3.00% 2.00% 3.50% Beta 1.25 % 1.50% 1.30% 1.40% Market Return 12.00% 11.00 % 10:00% 8:00% Debt to Equity Ratio 2.5 3 4 3.5 Credit Spread om BPS 200 300 250 150
Following is the financial statements data for XYZ Corporation: XYZ Corp. Total Assets $23,565 Interest-Bearing Debt $12,131 Average borrowing rate for debt Common Equity: 11.7% Market Value $26,887 Marginal Income Tax Rate 35% Market Beta 1.91 Based on the information above, what is the weight on equity capital that you can use to calculate the firm's weighted-average cost of capital (WACC) (Write your answer in percent, omit the "%" sign, and round your answer to two decimal places. For example, if your answer is 0.538, type in 53.80):
The activity ratios measure which of the following? Select one: O a the efficiency of the company's supply chain O b. the efficiency with which a company generates sales from its assets Oc the profitability of the company's activities Od the production efficiency of a company's fixed assets If the assumption of financial distress costs is added, then Modigliani and Miller (with taxes) predicts that the optimal capital structure is 100% debt Select one: O True O False
Consider the following data for the firms Acme and Apex: Equity ($ million) Debt ($ million) ROC Cost of Capital Acme 290 145 17% 9% Apex 1,450 483 15% 10% a. Calculate the economic value added for Acme and Apex (round to 2 decimal places). Economic value added for Acme $? million Economic value added for Apex $? million b. Calculate the economic value added per dollar of invested capital for Acme and Apex (round to 2 decimal places)? Economic value added for Acme per dollar Economic value added for Apex per dollar
Given the following income statements of three companies, which appears to have greater financial leverage (i.e. greater debt) based upon the interest coverage ratio? Firm A Firm B Firm C EBIT $50 $100 $75 Interest 10 15 5 EBT 40 85 70 Taxes 20 45 50 EAT 20 40 20
The figure below shows the weighted average cost of capital, cost of equity, and cost of debt for a firm (The y-axis is: Cost of capital: r (%); the x-axis is: Debt-to-equity Ratio: Con of capital O under M&M assumptions except for corporate taxes and financial distress costs under M&M assumptions O under M&M assumptions except for corporate taxes O under M&M assumptions except for financial distress costs
which one is correct please confirm? Q24: In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT ____. a. flotation costs b. the firm’s growth rate of dividends c. the firm’s before-tax cost of debt d. the firm’s tax rate
Consider the following data for the firms Acme and Apex: Acme Apex Required: Equity Debt ($ million) ($ million) 210 1,050 105 350 ROC Cost of Capital (*) (%) 17% 9% 15% 10% a-1. Calculate the economic value added for Acme and Apex. a-2. Which firm has the higher economic value added? b-1. Calculate the economic value added per dollar of invested capital for Acme and Apex. b-2. Which firm has the higher economic value added per dollar of invested capital? Answer is not complete. Complete this question by entering your answers in the tabs below. Required A1 Required A2 Required B1 Required B2 Calculate the economic value added for Acme and Apex. Note: Enter your answers in millions rounded to 2 decimal places. Economic value added for Acme million Economic value added for Apex million
Can you explain the information below market value added (MVA) analysis and interpretation of results below. Market Value of Equity:$133,341,000,000.00 Plus: Market Value of Debt:$13,677,000.00 Equals: Market Value of Firm:$133,354,677,000.00 Minus: Total Invested Capital:($1,944,100.00) Equals: MVA$133,356,621,100.00
8.4 Richmond Clinic has obtained the following estimates for its costs of debt and equity at various capital structures: Debt (%) After-Tax Cost of Debt (%) Cost of Equity (%) 0 — 16.0 20 6.6 17.0 40 7.8 19.0 60 10.2 22.0 80 14.0 27.0 What is the firm’s optimal capital structure? (Hint: Calculate its corporate cost of capital at each structure. Also, note that data on component costs at alternative capital structures are not reliable in real-world situations)
if A firm's current balance sheet is as follows: Assets $100 Debt $10 Equity $90 a. what is the firm's weighted-average cost of capital at various combinations of debt and equity, given the following information? Debt/assets after-tax cost of Debt cost of equity cost of capital 0% 8% 12% ? 10 8 12 ? 20 8 12 ? 30 8 13 ? 40 9 14 ? 50 10…
Calculate the cost of equity: Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table. Table 1: Information of the firms Unlevered firm Levered firm EBIT 10,000 10,000 Interest 0 3,200 Taxable income 10,000 6,800 Tax (tax rate: 34%) 3,400 2,312 Net income 6,600 4,488 CFFA 0 -3,200 Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5 Fill in the blanks What is the present value of the tax shield? Cost of Capital = (10% x 0.5) + (8% x 0.5 x (1-0.34) = 7.64% PV of Tax Shield = (3,200 x 0.34) / (1+0.0764) = 1,010.78 What is the size of debt? Interest / Cost of Debt (3,200 / 8%) = 40,000 Calculate the following values:a) Value of Unlevered Firm 10,000 x (1-34%) / 10% 6,600 / 10% = 66,000 b) Value of the Levered Firm 66,000 + 34% x 40,000 66,000 + 13,600 = 79,600 c) Equity Value…

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