Consider XYZ Corporation, which has $50 million of assets, 80% of which are financed with equity and 20% of which are financed with debt. There are 1 million shares of XYZ Corporation stock outstanding, valued at $40 per share. The company’s current balance sheet is simple: XYZ Corporation Balance Sheet ------------------------------------------------- Assets $50,000,000 Debt $10,000,000 Equity $40,000,000 Suppose XYZ Corporation has investment opportunities requiring $20 million of new capital. Further, suppose XYZ Corporation can raise the new capital in one of three ways: Scenario #1: Issue $20 million equity (500,000 shares of stock at $40 per share) Scenario #2: Issue $10 million equity (250,000 shares of stock at $40 per share) and borrow $10 million through a bond issue with an annual interest rate of 8% Scenario #3: Borrow $20 million through a bond issue with an annual interest rate of 8% What does the new capital structure look like for XYZ Corporation in each scenario? For each scenario, please provide: Assets - Debt/Equity - Debt to Equity ratio - Debt to Capital ratio -

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 2P

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Consider XYZ Corporation, which has $50 million of assets, 80% of which are financed with equity and 20% of which are financed with debt. There are 1 million shares of XYZ Corporation stock outstanding, valued at $40 per share. The company’s current balance sheet is simple:

XYZ Corporation

Balance Sheet

-------------------------------------------------

Assets $50,000,000 Debt $10,000,000

Equity $40,000,000

Suppose XYZ Corporation has investment opportunities requiring $20 million of new capital. Further, suppose XYZ Corporation can raise the new capital in one of three ways:

Scenario #1: Issue $20 million equity (500,000 shares of stock at $40 per share)

Scenario #2: Issue $10 million equity (250,000 shares of stock at $40 per share) and borrow $10 million through a bond issue with an annual interest rate of 8%

Scenario #3: Borrow $20 million through a bond issue with an annual interest rate of 8%

What does the new capital structure look like for XYZ Corporation in each scenario?

For each scenario, please provide:

Assets -

Debt/Equity -

Debt to Equity ratio -

Debt to Capital ratio -

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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