d. Now suppose that the firm plans instead to increase long-term debt only to $1,100 and doesnot wish to issue any new shares of stock. What is now the balancing item? 12. Using Percentage of Sales. Eagle Sports Supply has the following financial statements.Assume that Eagle's assets are proportional to its sales. (LO18-2)INCOME STATEMENT, 2019Sales$950Costs250Interest50Taxes150Net income$500BALANCE SHEET, YEAR-END2018201920182019Assets$2,700$3,000Debt$ 900$1,000Equity1,8002,000$3,000Total$2,700$3,000Total$2,700

Every journal entry in account has 2 effect on financial statement.One is debit and another is…

Answered: Now suppose that the firm plans instead…

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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(b) Assume that Modigliani-Miller Propositions 1 and 2 hold. Ex- plain carefully why the conclusion of each of the following argu- ments is incorrect: (i) As a firm borrows more and debt becomes risky, both share- holder and bondholders demand higher rates of return. Thus, by reducing its debt ratio, a firm can reduce both the cost of debt and the cost of equity. (ii) As leverage increases, the ratio of the market value of a firm's equity to income (after debt interest) increases.
5. Evidence that stocks that outperform the market this month also outperform the market next month would tend to disconfirm which form of the efficient capital markets hypothesis? a. the weak form b. the semi-strong form c. the strong form d. the weak and semi-strong forms e. all forms
Suppose you are the president of a small, publicly - traded corporation. Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. In this case, the appropriate marginal cost of capital for use in capital budgeting during the current year is the after-tax cost of debt. Question 2 options: True False
8. Which of the following does the trade-off theory predict? A. Bankruptcy costs mean having no debt is always optimal. B. Reducing leverage always reduces firm value. C. In the long run the firm's capital structure converges to the optimal one. D. None of the above.
Which of the following statements about payout policy is FALSE? a. Share repurchases concentrate ownership in the hands of the remaining shareholders, making their shares worth more than they were before the repurchase. b. Firms should generally pay out no more than their free cash flow to equity, unless they are in the process of paying out a large cash balance. c. Dividends typically increase at a slower rate than earnings. d. Firms today return more cash to shareholders through repurchases than through dividends. e. Dividends are lower for firms that have higher growth rates.
4 a. Investors will only invest in a stock if it gives a higher return than they could get elsewhere. Therefore, if a stock is fairly priced, its expected return will be greater than the cost of equity capital. Skipped O False True b. A stock that is expected to pay a level dividend in perpetuity has value of Po=DIV₁/r. Any company that can reinvest to grow its earnings will have a greater value. O False True c. The dividend discount model is still logically correct even for stocks that do not currently pay a dividend. False True
North Star is trying to determine its optimal capital structure, which now consists of only common equity. The firm will add debt to its capital structure if it minimizes its WACC, but the firm has no plans to use preferred stock in its capital structure. In addition, the firm’s size will remain the same, so funds obtained from debt issued will be used to repurchase stock. The percentage of shares repurchased will be equal to the percentage of debt added to the firm’s capital structure. (In other words, if the firm’s debt-to-capital ratio increases from 0 to 25%, then 25% of the shares outstanding will be repurchased.) North Star is a small firm with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firm’s debt cost at different debt levels: Debt-to-Capital Ratio (Wd)…
What are the factors that contribute to the temporary drop in a company's share price after a capital-raising plan is announced?
North Star is trying to determine its optimal capital structure, which now consists of only common equity. The firm will add debt to its capital structure if it minimizes its WACC, but the firm has no plans to use preferred stock in its capital structure. In addition, the firm’s size will remain the same, so funds obtained from debt issued will be used to repurchase stock. The percentage of shares repurchased will be equal to the percentage of debt added to the firm’s capital structure. (In other words, if the firm’s debt-to-capital ratio increases from 0 to 25%, then 25% of the shares outstanding will be repurchased.) North Star is a small firm with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firm’s debt cost at different debt levels: Debt-to-Capital Ratio (Wd)…
If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected rate of return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. The second approach involves adjusting the cost of common equity as follows: Cost of equity from new stock = r, D1 +8 Po(1-F) The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment. Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.90 and it expects dividends to grow at a constant rate g = 4.3%. The firm's current common stock price, Po, is $25.00. If it needs to issue…
North Star is trying to determine its optimal capital structure, which now consists of only common equity. The firm will add debt to its capital structure if it minimizes its WACC, but the firm has no plans to use preferred stock in its capital structure. In addition, the firm’s size will remain the same, so funds obtained from debt issued will be used to repurchase stock. The percentage of shares repurchased will be equal to the percentage of debt added to the firm’s capital structure. (In other words, if the firm’s debt-to-capital ratio increases from 0 to 25%, then 25% of the shares outstanding will be repurchased.) North Star is a small firm with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firm’s debt cost at different debt levels: Debt-to-Capital Ratio (Wd)…
(35) (P-C Parity Arbitrage) A European Call price is C= $ 3.50, on a ZERO dividend. A similar Put price is P= $ 2.50. The stock price S= $ 51 , strike price X= S 50 , T= 1 year, and R = 2%. (a) Determine what the CALL Price SHOULD be. (b) How much should your arbitrage profit be? (c) Focusing on Real vs. Synthetic Call, specify ALL time 0 trade details. (d) At expiration in 1 year at T, show the ending details { both if S is HIGH or LOW }.

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Now suppose that the firm plans instead to increase long-term debt only to $1,100 and does not wish to issue any new shares of stock. What is now the balancing item?