Solve question Ph Co. has an 8% debt with a book value of 8 M and a commonstock of 8.5 M with outstanding shares of 370,000. The expectedlevel of EBIT after the expansion is 3.5 M. The income tax rate is25%. The firm is considering a 12 M expansion program using oneof the following:Plan 1 - Incur additional debt at 10% interest;Plan 2 - Sell preferred shares with an 11.5% dividend yield; andPlan 3 - Sell new common stock at 25 per share.How much is the EPS for Plan 1?

Step 1: Calculate Interest Expense for the Additional DebtAdditional Debt: $12,000,000Interest Rate:…

Answered: Ph Co. has an 8% debt with a book value…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 20P

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Ph Co. has an 8% debt with a book value of 8 M and a common stock of 8.5 M with outstanding shares of 370,000. The expected level of EBIT after the expansion is 3.5 M. The income tax rate is 25%. The firm is considering a 12 M expansion program using one of the following: Plan 1 - Incur additional debt at 10% interest; Plan 2 - Sell preferred shares with an 11.5% dividend yield; and Plan 3 - Sell new common stock at 25 per share. How much is the EPS for Plan 1?
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Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.60 (given its target capital structure). Vandell has $8.57 million in debt that trades at par and pays a 7.4% interest rate. Vandell’s free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 25% combined federal-plus-state tax rate, the same rate paid by Hastings. The risk-free rate of interest is 4%, and the market risk premium is 6%. Hasting’s first step is to estimate the current intrinsic value of Vandell.
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.25 (given its target capital structure). Vandell has $10.53 million in debt that trades at par and pays a 7.2% interest rate. Vandell’s free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 6% a year. Both Vandell and Hastings pay a 35% combined federal and state tax rate. The risk-free rate of interest is 7% and the market risk premium is 5%. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.3 million, $2.9 million, $3.5 million, and $3.51 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 6% rate. Hastings plans to assume Vandell’s $10.53 million in debt (which has an 7.2% interest rate) and raise additional debt financing at the time of the…
ABC Ltd. needs Rs 500 lacs for an expansion plan that is expected to yield 15% return on assets. Currently its return on asset is 12% and the firm is all equity funded. For expansion it has alternatives of funding the entire expenditure either through debt or equity. Following information is available: Nos. of shares already existing 20 lacs Price at which the shares can be issued (Rs) Rs 50 Existing interest Rs 30 lacs Interest rate on debt 10% Tax rate 40% Find out the new EPS with equity and debt financing. Also find at what level of earnings the firm is indifferent to mode of financing.
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Vandell has $11.22 million in debt that trades at par and pays a 7.2% interest rate. Vandell's free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Both Vandell and Hastings pay a 30% combined federal and state tax rate. The risk-free rate of interest is 4% and the market risk premium is 6%. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's free cash flows to be $2.6 million, $2.9 million, $3.4 million, and $4.00 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell's $11.22 million in debt (which has a 7.2% interest rate) and raise additional debt financing at the time of the…
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A) Donner, Inc. will finance a proposed investment by issuing new securities while maintaining its optimal capital structure of 60% debt and 40% equity. The firm can issue bonds at a price of $950.00 before $15 flotation costs. The 10 -year bonds will have an annual coupon rate of 8% and a face value of $1,000. The company can issue new equity at a before-tax cost of 16% and its marginal tax rate is 34%. Calculate WACC. B) GHJ Inc. is investing in a major capital budgeting project that will require the expenditure of $16 million. The money will be raised by issuing $2 million of bonds, $4 million of preferred stock, and $10 million of new common stock. The company estimates is after-tax cost of debt to be 7%, its cost of preferred stock to be 9%, the cost of retained earnings to be 14%, and the cost of new common stock to be 17%. What is the weighted average cost of capital for this project?
sorensen systems inc. is expected to pay a $2.50 dividend at year end (d1=$2.50), the dividend is expected to grow at a a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. the before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company's WACC?
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The Management of "Tanjung Uda Berhad" is planning a RM4,000,000 expansion this year. The expansion can be financed by issuing either common shares of bonds. The new common share can be sold for RM$5 per share. The bonds can be issued with a 12% coupon rates. The firm's existing preference share pay dividends of RM$2 per share. The company's corporate income tax is 30%. The financial statement of Tanjung Uda Berhad is as follow:- Current Assets Fixed Assets Current Liabilities Bonds: (8.5%, RM1,000 par value) (9%, RM1,000 par Value) Preference Shares (RM$ 100 par value) Ordinary Shares (RM$ 2 par value) Retained Earnings Tanjung Uda Berhade Balance Sheet as at 31st December 2022 RM$ 2,000,000+ RM$ 8,000,000+ RM$ 10,000,000 RM$ 1,500,000 RM$ 4,000,000 RM$ 1,000,000+ RM$ 500,000+ RM$ 2,400,000+ RM$ 600,000+ RM$ 10,000,000+ Required: a) Calculate the WACC for the company without taking into consideration the expansion plan mentioned above, which means using the original Balance sheet…

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