a) Falco Inc. is considering a debt issue and is trying to determine the appropriate amount to issue. Considering the information in the table below, indicate which amount borrowed you believe to be the optimal level of debt and explain completely why. b) Part of our discussion about the optimal capital structure problem considered a set of equivalent problems (and one additional problem that was not equivalent) that could be solved and analyzed using graphical solutions. Graphically demonstrate the optimal level of debt using the information from the table above.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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a) Falco Inc. is considering a debt issue and is trying to determine the appropriate amount to issue. Considering the information in the table below, indicate which amount borrowed you believe to be the optimal level of debt and explain completely why.

b) Part of our discussion about the optimal capital structure problem considered a set of equivalent problems (and one additional problem that was not equivalent) that could be solved and analyzed using graphical solutions. Graphically demonstrate the optimal level of debt using the information from the table above.

Value of
Value of
Stock
Amount Borrowed
Equity
the Firm
Price
WACC
EPS
13.0%
18,460
17,320
15,830
14,020
16,570
12,000
NOTE: Value of the Firm is equal to the Amount Borrowed plus the Value of Equity
18,460
19,320
19,830
20,020
18.46
2.40
$ 2 Million
$ 4 Million
$ 6 Million
$ 8 Million
19.32
12.42
2.55
19.83
12.10
2.70
20.03
11.99
2.54
24,570
24.57
11.50
3.04
$10 Million
22,000
22.00
12.00
3.20
Transcribed Image Text:Value of Value of Stock Amount Borrowed Equity the Firm Price WACC EPS 13.0% 18,460 17,320 15,830 14,020 16,570 12,000 NOTE: Value of the Firm is equal to the Amount Borrowed plus the Value of Equity 18,460 19,320 19,830 20,020 18.46 2.40 $ 2 Million $ 4 Million $ 6 Million $ 8 Million 19.32 12.42 2.55 19.83 12.10 2.70 20.03 11.99 2.54 24,570 24.57 11.50 3.04 $10 Million 22,000 22.00 12.00 3.20
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