fin320 (Capital structure analysis)The Karson Transport Company currently has net operating income of $494,000 and pays interest expense of $194,000. The company plans to borrow $1.05 million on which the firm will pay 12 percent interest. The borrowed money will be used to finance an ivestment that is expected to increase the firm's net operating income by $397,000 a year. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? The times interest earned ratio is ___times. (Round to two decimal places.) What effect will the loan and the investment have on the firm's times interest earned ratio? The new times interest earned ratio ___times. (Round to two decimal places.)
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
fin320
(Capital structure analysis)The Karson Transport Company currently has net operating income of $494,000 and pays interest expense of $194,000. The company plans to borrow $1.05 million on which the firm will pay 12 percent interest. The borrowed money will be used to finance an ivestment that is expected to increase the firm's net operating income by $397,000
a year.
- What is Karson's times interest earned ratio before the loan is taken out and the investment is made?
The times interest earned ratio is ___times. (Round to two decimal places.)
- What effect will the loan and the investment have on the firm's times interest earned ratio?
The new times interest earned ratio ___times. (Round to two decimal places.)
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