Company TechGear Ltd. is a technology company that manufactures and sells smartphones. They are currently analyzing their financial structure to understand how changes in sales and financing can impact their profitability and risk calculating the leverage position. The CFO of TechGear obtained the following information for the calculation: Sales: Fixed Costs: Variable Costs per Smartphone: Selling Price per Smartphone: Interest Expense: Total Common Shares Outstanding: Total Preferred Shares Outstanding: Preferred Dividend Per Share: Tax Rate 50,000 units BDT 80,000,000 BDT 15,000 BDT 20,000 BDT 20,000,000 1,000,000 600,000 BDT 10 40% a. Calculate the Degree of Operating Leverage, Degree of Financial Leverage, and Degree of Total Leverage for the company. b. What would happen to the company's leverage positions if its existing mobile phone sales drop by 20% due to a new competitor's entry into the smartphone business? c. Compare and comment on the riskiness of the company under two scenarios in (a) and (b). Briefly explain how the inclusion of fixed costs affects a company's risk and profitability under the above scenarios.

Company TechGear Ltd. is a technology company that manufactures and sells smartphones. They are currently analyzing their financial structure to understand how changes in sales and financing can impact their profitability and risk calculating the leverage position. The CFO of TechGear obtained the following information for the calculation: Sales: Fixed Costs: Variable Costs per Smartphone: Selling Price per Smartphone: Interest Expense: Total Common Shares Outstanding: Total Preferred Shares Outstanding: Preferred Dividend Per Share: Tax Rate 50,000 units BDT 80,000,000 BDT 15,000 BDT 20,000 BDT 20,000,000 1,000,000 600,000 BDT 10 40% a. Calculate the Degree of Operating Leverage, Degree of Financial Leverage, and Degree of Total Leverage for the company. b. What would happen to the company's leverage positions if its existing mobile phone sales drop by 20% due to a new competitor's entry into the smartphone business? c. Compare and comment on the riskiness of the company under two scenarios in (a) and (b). Briefly explain how the inclusion of fixed costs affects a company's risk and profitability under the above scenarios.

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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In addition to footwear, Kenneth Cole Productions designs and sells handbags, apparel, and other accessories. You decide, therefore, to consider comparables for KCP outside the footwear industry. You also know the following about KCP: it has sales of $518 million, EBITDA of $55.6 million, excess cash of $100 million, $3 million of debt, EPS of $1.65, book value of equity of $12.05 per share, and 21 million shares outstanding. a. Suppose that Fossil, Inc., has an enterprise value to EBITDA multiple of 11.51 and a P/E multiple of 16.01. What share price would you estimate for KCP using each of these multiples, based on the data for KCP? b. Suppose that Tommy Hilfiger Corporation has an enterprise value to EBITDA multiple of 8.46 and a P/E multiple of 17.86. What share price would you estimate for KCP using each of these multiples based on the data for KCP? a. Suppose that Fossil, Inc., has an enterprise value to EBITDA multiple of 11.51 and a P/E multiple of 16.01. What share price would…
Hamada equation Original % debt in capital structure, wd Original % common equity in capital structure, wc Risk-free rate, TRF Market risk premium, RPM Tax rate, T Firm's cost of equity, rs Calculation of firm's current beta: Firm's current beta, b Calculation of firm's unlevered beta: Firm's unlevered beta, bu New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New Calculation of firm's new beta: Firm's new beta, bL New Calculation of firm's new cost of equity: Firm's new cost of equity, rs New 30.00% 70.00% 5.00% 7.00% 40.00% 14.00% 50.00% 50.00% Formulas #N/A #N/A #N/A #N/A
Amcor Ltd is a paper packaging company that currently has a beta of 0.49,debt with a market value of $11.5 million and equity with a market value of $5.7 billion.Amcor is considering expanding into the manufacture of personal protective equipment,a project that is of similar risk to the activities of Ansell Ltd.Ansell's beta is 0.91,and it has debt of with a market value of $1.4 billion and equity with a market value of $2 million. The current cost debt for Amcor is 5% p.a. compounding semi-annually,the current yield on government bonds is 2% p.a. and the equity market risk premium is estimated to be 6% p.a. compounded annually.The tax rate is 30%. a.Calculate Amcor's cost of equity for this project. b.Calculate Amcor's WACC for the project.
The financial manager for "ERR" industrial Company would extend the credit terms from "net 30" to "net 45" in order to stimulate credit sales. 'ERR' Company also benefits from relaxing of terms from its suppliers from "net 30" to "net 35". The manager is wondering how to estimate the financial impact of these alternatives would have on the shareholder's wealth. The financial manager estimates that the daily sales increase at a growth rate equals 10% following the extension of DSO. You gathered the following information:Purchase amount = 40% of sales amount Annual sales amount = $31,025,000 The annual cost of capital = 10% Inventory turnover =18.25 1- Calculate the daily NPV of the current terms. 2- Calculate the daily NPV of the proposed terms. 3- Based on your own calculations, what is your recommendation? Why? 4- Calculate the NPVCCP of the present terms. Interpret. 5- Calculate the ANPVCCP-aggregate of the Company. Interpret.
am. 128.
To illustrate the effects of financial leverage for PizzaPalace’s management, consider two hypothetical firms: Firm U (which uses no debt financing) and Firm L (which uses $4,000 of 8% interest rate debt). Both firms have $20,000 in net operating capital, a 25% tax rate, and an expected EBIT of $2,400. (1) Construct partial income statements, which start with EBIT, for the two firms. (2) Calculate NOPAT, ROIC, and ROE for both firms. (3) What does this example illustrate about the impact of financial leverage on ROE? (4) Why did leverage increase ROE in this example?
The analysis that we have to provide is as follows: Review the specifics of the IPO, including underwriting spread and other expenses. Consider the concept of underpricing and a higher than normal first day spike in stock price. What does this mean for the issuing company? What does this mean for the underwriter? The Mini Case we have to go off of is: Mutt.Com was founded in 2015 by two graduates of the University of Wisconsin with help from Georgina Sloberg, who had built up an enviable reputation for backing new start-up businesses. Mutt.Com's user-friendly system was designed to find buyers for unwanted pets. Within 3 years, the company was generating revenues of $3.4 million a year and, despite racking up sizable losses, was regarded by investors as one of the hottest new e-commerce businesses. Therefore, the news that the company was preparing to go public generated considerable excitement. The company's entire equity capital of 1.5 million shares was owned by the two founders…
You are an analyst at Apex Innovations, known for its cutting-edge technology in the renewable energy sector. Apex is considering moving into high-energy batteries. You have been assigned to determine the leverage beta for this new division. Apex, plans to maintain a target debt-to-equity ratio of 1.88. We comparing other companies in the high-energy battery sector, you learned the average beta is 0.83 and the industry's average debt-to-equity ratio is 1.56. The tax rate for Apex and the high energy battery sector is 25%. What is the industry's unleverage beta? What is the new division's leverage beta?
REQUIRED: • Vertical Analysis • Financial Ratio
A1. Payout policy (Answer all parts of this question.) (a) , What is the main theorem of Modigliani and Miller regarding the payout policy of firms? Explain. 1 (b) List four assumptions that must hold for the Modigliani-Miller theorem to be valid. (c) Consider a company that has 100 million shares outstanding. The market value of the company is currently at GBP 5 billion. Last year, the company paid out an annual dividend of GBP 2 per share. This year, the company intends to double the dividend to shareholders, but since the company has not enough cash, the company intends to raise the additional money required to pay the dividend in rights issue. i. ( If the price of a new share offered is GBP 25, what is the fair value of a right to buy a new share? Hint: The company first pays the dividends, and then raises the capital. ii. ( ) Contrary to theory, however, as soon as the company announces the rights issue, the share price drops. Why? Think of a reason why this transaction, i.e.,…
Handley Ltd is a firm that up until now has been involved in the manufacturing of plastic bottles used by milk distributors. It is considering pivoting towards producing wifi-enabled lighting systems and wants your help to estimate its after-tax weighted average cost of capital in order to assess the viability of this strategy.Handley Ltd currently have a debt-to-equity ratio of 0.6. They also have two sources of debt, commercial bills and long-term bonds, which, in aggregate, are each equivalent in market value to each other. The current yield on the commercial bills is 3.7% p.a. and the yield on the bonds is 4.1% p.a. The risk-free interest rate is estimated to be 3% p.a., the market risk premium 5.5% p.a. and the current beta of Handley Ltd shares is 0.7. The relevant corporate tax rate is 30%. 1. Estimate the after-tax WACC of Handley Ltd (in percentage terms to two decimal places e.g. 10.03%) 2. In no more than 3 lines explain whether it is appropriate for the company to use its…
Compare the following two companies. California Corp • Net income margin = 10% • Asset turnover = 3.00 • Financial leverage = 2.00 Indiana Corp • Net income margin = 40% • Asset turnover = 1.00 !3! • Financial leverage = 0.50 Which of the following statements are true? California Corp has relied on equitý to finance its assets more than Indiana Corp has California Corp has a lower return on equity than Indiana Corp OCalifornia Corp has a higher return on equity than Indiana Corp California Corp generates more sales for every dollar of assets than does Indiana Corp

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