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.
suppose that the Matrix corporation has $120 million of assets, all financed with equity, and that the form has 6 million shares of stock outstanding valued at $40 per share, suppose that management has identified investment opportunities requiring $60 million of new funds and can raise the funds in one of the following three ways: Financing package 1: Issue $60 million equity (3,000,000) shares of stocks at $40 per share) • Financing package 2: Issue $30 million equity (1,500,000) shares of stocks at $40 per share), and borrow $30 million with an annual interest rate 8% • Financing package 3: Borrow $60 million with an interest of 8%. a. Complete the following table for each financing package after the financing capital structure is completed: - Debt Equity No. of Shares Debt-equity ratio Debt-to- Financing package Assets Asset ratio 23 b. Suppose the Matrix Corporation has $27 million of operating earings. Show that the firm's return on assets is 15% c. compute the earnings per share…
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).…
3. Find the number of shares offered
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?
The Albany Company has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8% coupon rate). The company is planning a major expansion and is undecided between two financing plans. Plan A: Equity financing. Under this plan, an additional 2.5 million shares of common stock will be sold at $15 per share. Plan B: Debt financing. Under this plan, $37.5 million of 10% long-term debt will be sold.At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 21% marginal tax rate.
The Albany Company has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8% coupon rate). The company is planning a major expansion and is undecided between two financing plans.Plan A: Equity financing. Under this plan, an additional 2.5 million shares of common stock will be sold at $15 per share.Plan B: Debt financing. Under this plan, $37.5 million of 10% long-term debt will be sold.At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 40% marginal tax rate.
(b) A firm has determined its optimal capital structure which is composed of the following sources. Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 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 $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate of 3% for the last four years. It is expected that to sell, a new common stock issue must be underpriced, with floatation costs of $1 per share. Based on the above information, what is the firm's cost of preferred stock and cost of a new issue of common stock? Which of the two sources offers a lower cost? Show your workings. ( 10 )
H3. An unlevered firm with 300,000 shares outstanding has net income of $625,000. The firm’s stock sells for $9.50 per share and the book value per share is $12.00. The firm is considering an investment that is expected to cost $1 million and increase net income by $125,000. The cost of the investment will be financed with the issue of new shares. Assume the firm’s price-earnings ratio will remain constant. Does accounting dilution and/or market value dilution take place? Why? Show proper step by step calculation
The directors of Pav Limited have appointed you as their financial consultant. They are considering new investment projects and need you to calculate the cost of capital for the company.The present capital structure is as follows:-•3 450 000 ordinary shares with a par value of 75 cents per share. These shares are currently trading at R4.50 per share and the latest dividend paid is 30 cents. An average dividend growth of 13% is maintained.• 500 000 14% R3.00 preference shares, with a market value of R5.00 per share.• R5 000 000 non-distributable reserves• R5 200 000 8% debentures due in 6 years’ time and the current yield-to-maturity is 6%, and• R1 000 000 13% bank loan.Additional information:▪ The company has a beta of 1.8, a risk-free rate of 6% and enjoys a premium of 9%.▪ The company's tax rate is 30%. 1 Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of equity. 2. Calculate the adjusted weighted average cost of capital, using the…
ABC Limited is an all-equity firm and has a present capital structure of 10 million shares ofcommon stock, which trades at $12 per share. The company is contemplating an expansionprogramme that requires a capital cost of $18 million. Two alternative financing plans areunder consideration:Plan 1-(Equity financing). Sale of 1.5 million additional shares of common stock.Plan 2 (Debt financing). Issue $18.0 million in 12% Long-term debt.The firm’s marginal rate of tax is 35 percent.You are required to:a. Determine the break-even EBIT, given the two financing plans. b. Suppose ABC Limited’s EBIT is likely to be $24 million. Which alternative financingplan would you recommend, assuming you want to maximize EPS?
Divided Walls Construction (DWC) has determined that the yield to maturity (YTM) on new bonds is 5 percent, its cost of retained earnings is 8 percent, and its cost of new common stock is 11 percent. If DWC’s capital structure consists of 40% debt and 60$ common equity, what is its weighted average cost of capital (WACC) if it (a) does not have to issue new stock to raise additional funds and (b) must issue new stock to raise additional funds? DWC’s marginal tax rate is 35 percent.

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