Tarzan Health Center has no debt but is considering two plans to add leverage. Plan A-issue P200,000 bonds; Plan B- issue P300,000 bonds. The proceeds from both proposals shall be used to return the same amount of common stock. Management wants to evaluate the impact of increasing Company's financial leverage. Data about the corporations current and proposed capital structure follows: Addl data: Interest in Plan A-P14,000; Plan B- P27,000 1. What is the market value of the equity under Plan A? 2. What is the market value of the firm under Plan B? 3. What is the weighted average cost of capital under Plan A? 4. What is the weighted average cost of capital under Plan B?
Tarzan Health Center has no debt but is considering two plans to add leverage. Plan A-issue P200,000 bonds; Plan B- issue P300,000 bonds. The proceeds from both proposals shall be used to return the same amount of common stock. Management wants to evaluate the impact of increasing Company's financial leverage. Data about the corporations current and proposed capital structure follows: Addl data: Interest in Plan A-P14,000; Plan B- P27,000 1. What is the market value of the equity under Plan A? 2. What is the market value of the firm under Plan B? 3. What is the weighted average cost of capital under Plan A? 4. What is the weighted average cost of capital under Plan B?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Tarzan Health Center has no debt but is considering two plans to add leverage. Plan A-issue P200,000 bonds; Plan B- issue P300,000 bonds. The proceeds from both proposals shall be used to return the same amount of common stock. Management wants to evaluate the impact of increasing Company's financial leverage. Data about the corporations current and proposed capital structure follows:
Addl data: Interest in Plan A-P14,000; Plan B- P27,000
1. What is the market value of the equity under Plan A?
2. What is the market value of the firm under Plan B?
3. What is the weighted average cost of capital under Plan A?
4. What is the weighted average cost of capital under Plan B?
Transcribed Image Text:Cost of debt
Cost of equity
EBIT
Current
0
0.100
P100,000
Plan A
0.070
0.105
P100,000
Plan B
0.09
0.12
P100,000
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