Q5. A Company is planning to change its debt - equity ratio and following three financial plans areavailable:Financial PlansDebt (r-12%)500025007500Equity500075002500Company operates in three different situations Relax, Moderate and extreme, where fixed cost differssuch as Rs. 1000, Rs. 2000 and Rs. 3000 respectively. The total capacity of the company to produceannually is 1200 units whereas company is not using the full capacity and producing only 800 units.Company sell its product as 15 Rs. Per unit but also spends 10 Rs. Per unit on Material and othervariable expenses. You are required to calculate Operating and Financial Leverage under situation A,B, and C for three different financial plans I, Il and III respectively and suggest which financial plancompany should chose under which situation.Q6. (a) Company uses more of borrowed financing because Debt is always considers a cheapersource of Finance. While on the other hand, NOI approach of Capital Structure, argues that increaseof debt will not have any effect on Overall Cost of Capital. In light of these two contradictorystatements, identify the relationship between the debt- equity ratio and cost of capital while deciding

Operating Leverage and financial leverage are two important analytical ratios of financial…

Answered: Q5. A Company is planning to change its…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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only looking for the answer to b-1
Problem CThe financial breakeven point of Soil Inc. is P90,000, while the tax rate applicable to the company is 30%. The company pays 10% interest on the P200,000 outstanding loan. How much is the total preferred dividends distributed?Answer format: "PHP XXX,XXX.XX"
Johnson Ltd requires advice on its debt collection policy. Its directors are considering two options for reducing bad debts and shortening the period of credit extended to its debtors. Option 1 involves employing an additional credit controller and option 2 involves employing 2 extra staff and allocating additional office space. The costs and likely effect of each of these options is set out below and compared to the current position. Current policy Option 1 Option 2 Annual expenditure on debt collection procedures £120,000 £150,000 £200,000 Bad debt losses (% of sales) 3% 2% 1% Average collection period 2 months 1½ months 1 month Current sales are £4,800,000 a year, and the company requires a 20% return on its investments. Required: Should the current policy be discarded in favour of option 1 or option 2?
Q5 The EBIT of the unlevered company is OMR 60,000; cost of equity of unlevered company is 8% and the corporate tax rate is 30%, then what is the value of unlevered company (Vu) under Modigliani-Miller Model? a. OMR 375,000 b. OMR 525,000 c. OMR 275,000 d. OMR 425,000
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Problem C: Liquidity RatiosABC has P400,000 cash, P200,000 short‐term investments, P500,000 receivables, and P900,000 inventories. It has trade payables ofP600,000 and short‐term loans of P900,000. It is planning to acquire another short‐term loan. However, the first loan requires ABCto maintain a minimum current ratio of 125%.Required:1. Current ratio before additional loan*2. Current ratio if ABC borrowed P300,000*3. Current ratio if ABC borrows P600,000*
The Digital Warehouse has an outstanding debt of R580 000 with an interest rate of 9, 15%. The company's sales amount to R4 290 000, the tax rate is 40%, and the net profit margin is 3,5%. What is the company's times interest earned ratio? 1. 1, 13 times 2. 4,70 times 3. 5,72 times 4. 7,93 times
Based on the information above, what is P/E ratio of the firm? Group of answer choices 12 14 13 15
ABC Corp is a manufacturing company with the following information: 1, Financial Statements: Net Income: $10 million Depreciation: 55 million Capital Expenditures (CapEx): $8 million Changes in Working Capital. $2 million (increase) 2. Balance Sheet Total Debt: $40 million (long-term debt) Total Equity: $60 million Total Assets $100 million 3. Market information: Risk Free Rate: 3% Market Risk Premium: 5% Comparable Companies Unlevered Beta 1.0 (overage of industry peers) Tax Rate: 30% Current Stock Price: $25 per share Number of Shares Oustanding 4 million 4. Assumptions: Terminal Growth Rate: 5% Long-term WACC: 0.25% less than the Initial WACC Questions: a. Calculate the Free Cash Flow to the Firm (FCFF) for ABC Corp for the next five years. b. Determine the Cost of Equily using the Capital Asset Pricing Model (CAPM) with unleverted bela. c. Cakulate the Levered Beta for ABC Corp by using the industry average unlovered beta and the company's capital structure d. Calculate the Cost of…
The Digital Warehouse has an outstanding debt of R580 000 with an interest rate of 9, 15%. The company's sales amount to R4 290 000, the tax rate is 40%, and the net profit margin is 3,5%. What is the company's times interest earned ratio? 1. 1, 13 times 2. 4 , 70 times 3. 5,72 times 4. 7, 93 times
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
Q2. A company currently has annual sales of Rs. 500,000 and an average collection period of 30 days. It is considering a more liberal credit policy. If the credit period is extended, the company expects sales and bad-debt losses to increase in following manner: Credit policy А Increase in credit period Increase in sale (Rs) Bad debts % of total sales 25,000 1.2 35,000 1.5 40,000 1.8 50,000 ABCDE 10 days 15 30 42 2.2 The selling price per unit is Rs 2. Average cost per unit at the current level of operations is Rs. 1.50 and variable cost per unit is Rs. 1.20. if current bad debt loss is 1% and required rate of return on investment is 20%, which credit policy should be undertaken? Ignore taxes and assume 360 days in a year.

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