Management of a company does not want to violate a workingcapital restriction contained in its bond indenture. If the firm'scurrent ratio falls below 2 to 1, technically it will be defaulted.The firm's current ratio is now 2.4 to 1. if current liabilities are P200 million, the maximum new commercial paper that can beissued to finance inventory expansion is Pmillion

Lets understand the basics. Current ratio compares the current asset with the current liabilities.…

Answered: Management of a company does not want…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Similar questions

Micolash Industries plans to reduce the use of debt financing and increase the use of equity financing (for example, move from a 70% Debt-to-Capital Ratio to 50%). Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate (say 40%) all remain constant. Which of the following would occur? Group of answer choices The company’s interest expense would remain constant. The company would have less common equity than before. The company’s taxable income (EBT) would fall. The company would have to pay more taxes. The company’s net income would decrease.
Slush Corporation has two bonds outstanding, each with a face value of $3.4 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.14 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect? Note: Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount. Payoff of bond B
B.F. Pierce & Company is considering changing its capital structure. The company currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: 8.66% 9.21% 8.83% Market Debt-to- Value Ratio 9.07% (WD) 0.00 0.20 0.40 0.60 0.80 Market Equity-to- Value Ratio (WE) 1.00 0.80 0.60 0.40 0.20 Market Debt-to- Equity Ratio (D/E) 0.00 0.25 0.67 1.50 4.00 Before-Tax Cost of Debt (rD) 5.00% The company uses the CAPM to estimate its cost of common equity. Currently the risk-free rate is 4%, the market risk premium is 6%, and the company's tax rate is 25%. The company estimates that its beta now (which is unlevered because it currently has no debt) is 0.8. Based on this information, what is the firm's weighted average cost of capital at its optimal capital structure? 6.00% 7.00% 8.00% 9.00%
Slush Corporation has two bonds outstanding, each with a face value of $3.6 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.16 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect? Note: Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount. Payoff of bond B
LNP is a company with a liability of $110 million,which is due in 10 years. The company’s lone asset is $70 million held in cash. The only assumption is that term structure of interest rates remains flat at 5%. (a) Determine the present value of the company’s liability. (b) Without any calculations,briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective. Two bonds, A and B, are currently trading. Bond A is a 3-year coupon bond with a face value of $100, selling for $113.616; coupons are paid annually. Bond B is a perpetuity with an initial cash flow of $1 in one year’s time, with cash flows growing thereafter at 1% per year. (c) Caluclate Bond A’s coupon rate and the pricing of Bond B.
Company X has $10M of excess cash (i.e., cash that is not used in the company's operations) and operating assets that will generate risky (i.e., uncertain) future cash flows with a present value today of $25M. It has no other assets. The company has risky zero-coupon bonds outstanding with a face value of $20M, and no other debt. Who is likely to gain and who is likely to lose from the following maneuvers? a) Company X pays a cash dividend of $10M to its shareholders. b) Company X halts operations and sells all of its operating assets for $15M. It invests the proceeds from this sale along with its $10M of existing cash in Treasury Bills (i.e., risk free bonds).
7.
Kendall Corporation has no debt but can borrow at 6.5 percent. The firm’s WACC is currently 10 percent, and there is no corporate tax. What is the company’s cost of equity? Note: Do not round intermediate calculations and enter your answer as a percent rounded to the nearest whole number, e.g., 32. If the firm converts to 10 percent debt, what will its cost of equity be? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. If the firm converts to 45 percent debt, what will its cost of equity be? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What is the company’s WACC in parts (b) and (c)? Note: Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.
Slush Corporation has two bonds outstanding, each with a face value of $2.3 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.03 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect? Note: Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount. Payoff of bond B
Suppose that a firm has 5 bondholders each expecting to be paid today their principal of $1 million each. The firm is in default, as its going-concern value is only $3 million, falling short of the $5 million to be repaid. The firm could liquidate and sell all of its assets for a value of $1 million, so that each bondholder would recover $200,000 on their claim. The firm offers its bondholders a debt-for-equity swap, but four of out the five bondholders must participate and become equityholders for the swap to succeed. In the table below, calculate the "lower bound" payoff if only four bondholders participate and the "upper bound" payoff if all five bondholders participate. The correct answer is lower bound=$500,000 and upper bound=$600,000
ings Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £60m of debt on which it pays a 5% interest rate. Assume no transaction costs, no taxes and risk-free debt. The relevant numbers are provided in the following table (in £ m): A Value of Firm 100 120 Debt 60 Equity 100 60 Projected earnings before interest 12 12 Interest payment Not Interest rate 5% Applicable Please fill in the following statements a) A's return on equity is equal to b) B's return on equity is equal to C) A's weighted average cost of capital is equal to Shot on vivoZverage cost of capital is equal to WIDE Vivo Al camera Please answer the following questions
In considering Modigliani & Miller’s (M&M) Propositions I and II in a world with no taxes and no bankruptcy risk, assume Firm A is an all-equity firm with a required return on its assets (Ra) of 10%. Firm B is a levered firm and can borrow in the debt market at 7% (Rd). If M&M’s proposition II holds, what is the cost of equity and the WACC if Firm B is levered to 50% debt: is this capital structure better for Firm B? Show your calculations.

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