Don't used Ai solution Sand Key Development Company has a capital structure consisting of $20 millionof 10% debt and $30 million of common equity. The firm has 500,000 shares ofcommon stock outstanding. Sand Key is planning a major expansion and will needto raise $15 million. The firm must decide whether to finance the expansion withdebt or equity. If equity financing is selected, common stock will be sold at $75 pershare. If debt financing is chosen, 5% coupon bonds will be sold. The firm'smarginal tax rate is 34%. Determine the level of operating income at which SandKey would be indifferent between debt financing and equity financing.O $4,625,000O $5,150,000O $6,725,000$6,200,000O $5,675,000

To determine the level of operating income (EBIT) at which Sand Key Development Company would be…

Answered: Sand Key Development Company has a…

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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Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30 million of common equity. The firm has 500,000 shares of common stock outstanding. Sand Key is planning a major expansion and will need to raise $15 million. The firm must decide whether to finance the expansion with debt or equity. If equity financing is selected, common stock will be sold at $75 per share. If debt financing is chosen, 5% coupon bonds will be sold. The firm's marginal tax rate is 34%. Determine the level of operating income at which Sand Key would be indifferent between debt financing and equity financing.
Brooks Corporation is financed with $32 million of 9% debt and $68 million of common equity. The firm has 1 million shares of common stock outstanding. Brooks needs to raise $25 million and is undecided between two possible plans for raising this capital:Plan A: Equity financing. Under this plan, common stock will be sold at $62.50 per share.Plan B: Debt financing. Under this plan, 11% coupon bonds will be sold.At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 34% marginal tax rate.
The Albany Company has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8% coupon rate). The company is planning a major expansion and is undecided between two financing plans. Plan A: Equity financing. Under this plan, an additional 2.5 million shares of common stock will be sold at $15 per share. Plan B: Debt financing. Under this plan, $37.5 million of 10% long-term debt will be sold.At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 21% marginal tax rate.
The Albany Company has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8% coupon rate). The company is planning a major expansion and is undecided between two financing plans.Plan A: Equity financing. Under this plan, an additional 2.5 million shares of common stock will be sold at $15 per share.Plan B: Debt financing. Under this plan, $37.5 million of 10% long-term debt will be sold.At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 40% marginal tax rate.
IRIS Corp. has determined its optimal capital structure as follows. Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of the par value would be required in addition to the discount of $50. Preferred Stock: The firm has determined it can issue preferred stock at $45 per share par value. The stock will pay an $6.5 annual dividend. The cost of issuing and selling the stock is $2.5 per share. Common Stock: The firm's common stock is currently selling for $25 per share. The dividend expected to be paid at the end of the coming year is $3.75. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.45. It is expected that to sell, a new common stock issue must be underpriced at $2 per share and the firm must pay $0.75 per share in flotation costs. Additionally, the firm's marginal tax rate is 20 percent. Calculate the firm's weighted average cost of capital assuming the…
ABC Inc. has a the capital structure shown below. Liabilities Stockholders' Equity $122,099,000 $95,228,000 ABC Inc. will raise additional capital for new projects this year, in the amount of $44,978,000. The firm believes, however, that a capital structure with 56.25% debt is ideal. The firm will be able to issue new discount bonds at a price of $909 with a yield-to-maturity of 3%. Assuming they want to change their capital structure to the new target, how many new bonds will the firm need to issue? unur answer to the nearest bond.
Aspen Company is financed with $50 million of 8% debt and $75 million of common equity. The firm has 1 million shares of common stock outstanding. Aspen needs to raise $20 million and is undecided between two possible plans for raising this capital: Plan A: Equity financing. Under this plan, common stock will be sold at $100 per share. Plan B: Levered financing. Under this plan, half of the capital will be raised with equity at $100 per share and half will be raised by selling 12% coupon bonds. At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 34% marginal tax rate. $11.2 million $18.4 million $12.8 million $32 million Ⓒ$62.4 million
ABC Investments Inc. is currently managing a capital structure that includes a $3.5 million debt with an interest rate of 12.3%. The company is planning a $5 million expansion initiative and is evaluating five financing alternatives: Plan 1 2 3 4 Debt 0% 35% 50% 50% Preferred 0% 0% 0% 20% Equity 100% 65% 50% 30% 20% 5 60% 20% The preferred stock carries a 12% dividend rate, and the common stock is priced at $18 per share. Currently, the company has 750,000 shares of common stock outstanding and operates in a 40% tax bracket. a. If the earnings before interest and taxes are $1.5 million, what would be earning per share for five alternatives, assuming no immediate increase in the operating profit. b. Compute the degree of financial leverage (DFL) for each alternatives at the expected EBIT level of $1.5 million. c. Which alternative do you prefer and why?
A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $20. Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: The firm's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent.…
ABC Limited is an all-equity firm and has a present capital structure of 10 million shares ofcommon stock, which trades at $12 per share. The company is contemplating an expansionprogramme that requires a capital cost of $18 million. Two alternative financing plans areunder consideration:Plan 1-(Equity financing). Sale of 1.5 million additional shares of common stock.Plan 2 (Debt financing). Issue $18.0 million in 12% Long-term debt.The firm’s marginal rate of tax is 35 percent.You are required to:a. Determine the break-even EBIT, given the two financing plans. b. Suppose ABC Limited’s EBIT is likely to be $24 million. Which alternative financingplan would you recommend, assuming you want to maximize EPS?
River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $300,000 of debt at an interest rate of 12% and use the proceeds to repurchase 30,000 shares at $10 per share. Profits before interest are expected to be $130,000. What is the ratio of price to expected earnings for River Cruises before it borrows the $300,000? What is the ratio after it borrow?

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