16 17 2021 4 Debt/Capital Ratic Projected EPS Projected Stock Price 5 20% $ 4.20 $ 30% $ 4.45 $ 40% $ 4.50 $ 50% $ 4.80 $ 18 It is 2021 and your company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled a table of 2021 projections for EPS and the stock price at various debt levels. a. Assuming that the firm uses only debt and common equity, what is the optimal capital structure for 2021 (give percentage of debt and equity)? 19 Now, it is 2022 and your company is re-evaluating its target capital structure. The CFO now believes that the optimal capital structure is between 25% and 55%, and staff have compiled a table of 2022 projections for EPS and WACC at various debt levels. b. Assuming that the firm uses only debt and common equity, what is the optimal capital structure for 2022 (give percentage of debt and equity)? 20 2022 21 Debt/Capital Ratic Projected 22 25% S 35% S 45% S 55% $ 23 24 25 28 29 4.25 4.55 4.80 4.75 44.25 46.00 55.50 54.00 Projected WACC 12.89% 11.33% 13.22% 15.40% Optimal Capital Structure + -O Financial Leverage Effects Residual Dividend Model Stock Re www +

16 17 2021 4 Debt/Capital Ratic Projected EPS Projected Stock Price 5 20% $ 4.20 $ 30% $ 4.45 $ 40% $ 4.50 $ 50% $ 4.80 $ 18 It is 2021 and your company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled a table of 2021 projections for EPS and the stock price at various debt levels. a. Assuming that the firm uses only debt and common equity, what is the optimal capital structure for 2021 (give percentage of debt and equity)? 19 Now, it is 2022 and your company is re-evaluating its target capital structure. The CFO now believes that the optimal capital structure is between 25% and 55%, and staff have compiled a table of 2022 projections for EPS and WACC at various debt levels. b. Assuming that the firm uses only debt and common equity, what is the optimal capital structure for 2022 (give percentage of debt and equity)? 20 2022 21 Debt/Capital Ratic Projected 22 25% S 35% S 45% S 55% $ 23 24 25 28 29 4.25 4.55 4.80 4.75 44.25 46.00 55.50 54.00 Projected WACC 12.89% 11.33% 13.22% 15.40% Optimal Capital Structure + -O Financial Leverage Effects Residual Dividend Model Stock Re www +

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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QUESTION 2 (25 MARKS) (a) A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.Source of Capital Target Market ProportionsLong Term Debt25% Preferred Stock15% Common Stock60% Total Firm Value100%Debt:The firm can sell a 10-year, RM1,000 par value, 6% bond for RM945. 3Preferred Stock:The firm has determined it can issue preferred stock at RM70per share par value. The stock will pay a RM8annual dividend. Common Stock:A firm's common stock is currently selling for RM19per share. The dividend expected to be paid at the end of the coming year is RM1.85. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was RM1.50. Additionally, thefirm's marginal tax rate is 35%. Determine the weighted average cost of capital for the firm. (15 marks)
Q No. 1 Lucky Cement is trying to establish its optimal capital structure. Its current capital structure consists of 20% debt and 80% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 5%; the market risk premium, RPM, is 6%; and the firm’s tax rate is 40%. Currently, Lucky Cement has beta of 1.5. What would be Lucky Cement’s estimated cost of equity if it changed its capital structure to 40% debt and 60% equity? Should the company opt new capital structure? (Decide based on the cost of equity computations)?
D4
[7] In 2020 the return on assets was 14% and the debt ratio was 40%. Compute the return on equity. (a) 13.33% (b) 16.67% (c) 20% (d) 23.33% (e)..
Answer choices: $120 $130 $42 $55 $-92
Check my work Problem 5-16 Value-Weighted Indexes (LO4, CFA2) The following three defense stocks are to be combined into a stock index in January 2022 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance). Assume the index is scaled by a factor of 10 million; that is, if the total value of all firms in the market is $5 billion, the index would be quoted as 500. Douglas McDonnell Dynamics General International Rockwell Shares (millions) 1/1/22 Price 1/1/23 1/1/24 535 450 230 $ 89 70 99 $ 94 65 88 $ 109 79 105 a. Calculate the initial value of the index if a value-weighting scheme is used. Note: Round your answer to 2 decimal places. Index value b. What is the rate of return on this index for the year ending December 31, 2022? For the year ending December 31, 2023? Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. 2022 return…
QP15 15. Caleulating NPV Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant's vice president of finance has collected the following information: Plant Palmer Price earnings ratio 14.5 10 Shares outstanding 1,500,000 750,000 Earnings $4.200,000 $960,000 Dividends 1,050,000 470,000 Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 4 percent each year. Plant management believes that the acquisition of Palmer will provide the firm with some economies of scale that will increase this growth rate to 6 percent per year. a. What is the value of Palmer to Plant? b. What would Plant's gain be from this acquisition? c. If Plant were to offer $20 in cash for each share of Palmer, what would the NPV of the acquisition be? d. What is the most Plant should be willing to pay in cash per share for the stock of Palmer? e. Ir Plant were to offer 225.000 of its shares in exchange for the outstanding stock of Palmer,…
Domestic
H6
A5 6c DEF Company is comparing three different capital structures. Plan A is an all-equity plan and would result in 1000 shares of stock. Plan B would result in 700 shares of stock and $13,500 in debt. Plan C would result in 800 shares of stock and $9000 in debt. The firm’s EBIT will be $10,000 per year until infinity. The interest rate on the debt is 12%. c. Compute the break-even EBIT that will cause the EPS on Plan C to be equal to the all-equity EPS (Plan A).
Q13 The Engineering Company currently has 100,000 outstanding stocks selling at OMR 100 each. The firm has net profits of OMR 1,000,000 and wants to make new investments of OMR 2,000,000 during the period. The firm is also thinking of declaring a dividend of OMR 5 per share at the end of the current fiscal year. The market price of per stock at the end of the current year is expected to be OMR 120. How many number new stocks to be issued by the firm assume that dividend is declared under MM model? a. 10,000 stocks b. 15,000 stocks c. 20,000 stocks d. 12,500 stocks
470 -36 Assume that the dividend payout ratio will be 55 % when the rate on long term government bonds falls to 9%. Since investors are becoming more risk averse, the equity risk premium will rise to 8% and investors will require a 7% return. The return on equity will be 13%. What is the expected sustainable growth rate? a. 5.85 b. 7.15 c. 4.05 d. 6.75 e. 8.25

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