Problem 6-7 As the chief financial officer of Adirondack Designs, you have the following information: Next year's expected net income after tax but before new financing Sinking-fund payments due next year on the existing debt Interest due next year on the existing debt Common stock price, per share Common shares outstanding Company tax rate $ 46 million $ 21 million $ 16 million a. Times interest earned b. Times burden covered $ 31.0 a. Calculate Adirondack's times-interest-earned ratio for next year assuming the firm raises $56 million of new debt at an interest rate of 4 percent. b. Calculate Adirondack's times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equa $5.5 million. c. Calculate next year's earnings per share assuming Adirondack raises the $56 million of new debt. d. Calculate next year's times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Adirondack sells 2.1 million new shares at $27 a share instead of raising new debt. c. Earnings per share d. Times interest earned d. Times burden covered d. Earnings per share 26 million 30% Note: Do not round intermediate calculations. Round "Earnings per share" answers to 2 decimal places and other answers to 1 decimal place.
Problem 6-7 As the chief financial officer of Adirondack Designs, you have the following information: Next year's expected net income after tax but before new financing Sinking-fund payments due next year on the existing debt Interest due next year on the existing debt Common stock price, per share Common shares outstanding Company tax rate $ 46 million $ 21 million $ 16 million a. Times interest earned b. Times burden covered $ 31.0 a. Calculate Adirondack's times-interest-earned ratio for next year assuming the firm raises $56 million of new debt at an interest rate of 4 percent. b. Calculate Adirondack's times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equa $5.5 million. c. Calculate next year's earnings per share assuming Adirondack raises the $56 million of new debt. d. Calculate next year's times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Adirondack sells 2.1 million new shares at $27 a share instead of raising new debt. c. Earnings per share d. Times interest earned d. Times burden covered d. Earnings per share 26 million 30% Note: Do not round intermediate calculations. Round "Earnings per share" answers to 2 decimal places and other answers to 1 decimal place.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter7: Corporate Valuation And Stock Valuation
Section: Chapter Questions
Problem 26SP
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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.
Question
Transcribed Image Text:Problem 6-7
As the chief financial officer of Adirondack Designs, you have the following information:
Next year's expected net income after tax but before new financing
Sinking-fund payments due next year on the existing debt
Interest due next year on the existing debt
Common stock price, per share
Common shares outstanding
Company tax rate
$ 46 million
$ 21 million
$ 16 million
$ 31.0
26 million
30%
a. Calculate Adirondack's times-interest-earned ratio for next year assuming the firm raises $56 million of new debt at an interest rate
of 4 percent.
b. Calculate Adirondack's times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal
$5.5 million.
a. Times interest earned i
b. Times burden covered
c. Earnings per share
d. Times interest earned
d. Times burden covered
d. Earnings per share
c. Calculate next year's earnings per share assuming Adirondack raises the $56 million of new debt.
d. Calculate next year's times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Adirondack sells 2.1 million
new shares at $27 a share instead of raising new debt.
Note: Do not round intermediate calculations. Round "Earnings per share" answers to 2 decimal places and other answers to 1
decimal place.
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