20.2 A company's present capital structure consists of 1,000,000 shares of equity stock. It requires*10 million of external financing for which it is considering three alternatives. Alternative Acalls for issuing 1,000,000 equity shares (* 10 par); alternative B calls for issuing 600,000 equityshares (10 par) and 400,000 preference shares (10 par) carrying 11 percent dividend; alterna-tive C calls for issuing 200,000 equity shares (10 par) and 8 million of debentures carrying 15percent interest. The company's tax rate is 50 percent.Required:(a) What is the EPS - PBIT equation for alternatives A, B, and C?(b) Rank the alternatives according to EPS over varying levels of PBIT.itu charos (10 par) sellin

Let's break down the calculation and explanation for each alternative:**Alternative A: Issuing…

Answered: 20.2 A company's present capital…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter3: The Financial Environment: Markets, Institutions And Investment Banking

Section: Chapter Questions

Problem 9PROB

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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 Debt 25%Preferred Stock 15%Common Stock 60%Total Firm Value 100% Debt: The firm can sell a 10-year, RM1,000 par value, 6% bond for RM945.Preferred Stock: The firm has determined it can issue preferred stock at RM70 per share par value. The stock will pay a RM8 annual dividend.Common Stock: A firm's common stock is currently selling for RM19 per 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, the firm's marginal tax rate is 35%.Determine the weighted average cost of capital for the firm.
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5. Company cost of capital (S9.2) You are given the following information for Golden Fleece Financial: Long-term debt outstanding: $300,000 Current yield to maturity (rdebt): Number of shares of common stock: Price per share: Book value per share: Expected rate of return on stock (requity): Calculate Golden Fleece's company cost of capital. 8% 10,000 $50 $25 15%
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Question1: Cybernauts, Ltd., is a new firm that wishes to finance an expansion program and determine its capital structure. It can issue 20 percent debt or 18 percent preferred stock. The total capitalization of the firm will be $6 million, and common stock can be sold at $25 per share. The company is expected to have a 50 percent tax rate. Four possible capital structures being considered are as follows: Plan Debt Preferred Common 1 20% 20% 60% 2 35 25 40 3 50 0 50 4 40 25 25 What would be the earnings per share for the four alternatives if earnings before interest and taxes are at $1.5 million?
3. W&N (Pty) Ltd is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. Structure B Source of Capital Structure A Long-term debt R75,000 @ 16% coupon rate Preferred stock R10,000 with an 18% dividend R50,000 @ 15% coupon rate R15,000 with an 18% annual dividend Common stock 8,000 shares 10,000 shares a) Calculate two EBIT-EPS co-ordinates for each of the structures. Use EBIT of R40,000 and R60,000 (when making comparisons R30,000 and R50,000 apply to both structure A and B). Find their associated EPS values. /4/ /3/ b) Plot the two capital structures on a set of EBIT-EPS axes. (Please label your graph). /3/ c) Indicate over what EBIT range, if any, each structure is preferred. d) Discuss the leverage and risk aspects of each structure. /3/ e) Which structure would you recommend if the firm expects its EBIT to be R35,000. Explain. /3/ 4. Jane is 22 years old and is planning for her retirement at age 62 (ie first payment at 63).…
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Part II: Problem solving (30 points): A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Source of Capital Long-term debt Preferred stock Common stock equity Target Market Proportions 30% 5 65 Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required. Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: The firm's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm…
C. Levered plan Firm value? is…..
XYZ is comparing two different capital structures. Plan I would result in 13,000 shares of stock and $130,500 in debt. Plan II would result in 10,000 shares of stock $243,600 in debt. The interest rate on the debt is 10%. a). Ignoring taxes, compare plans I and II to an all equity plan assuming that EBIT will be $56,000. The all equity plan will result in 16,000 shares of stock OUTSTANDING. Which of the 3 plans has the highest EPS? And which has the lowest? b). In part A, what are the break-even levels of EBIT for plan I compared to an all equity plan? What about for plan II I compared to an all equity plan? Is one higher than the other? Why (explain). c). Ignoring taxes, when will EPS be identical for plans I and II?

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