The Findlay Computer Company has the following selected financial results. The company is considering a capital restructuring to increase leverage from its present level of 10% of capital. Show all of your calculation work and label all of your work so I can follow your calculation process. 1. Calculate Findlay’s ROE and EPS under its current capital structure. 2. Restate the financial statement line items shown, the number of shares outstanding, ROE, and EPS if Findlay borrows money and uses it to retire stock until its capital structure is 40% debt assuming EBIT remains unchanged and the stock continues to sell at its book value. (Develop the second column of the chart shown.) Recalculate same figures assuming Findlay continues to
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.
The Findlay Computer Company has the following selected financial results. The company is considering a capital restructuring to increase leverage from its present level of 10% of capital.
Show all of your calculation work and label all of your work so I can follow your calculation process.
1. Calculate Findlay’s ROE and EPS under its current capital structure.
2. Restate the financial statement line items shown, the number of shares outstanding, ROE, and EPS if Findlay borrows money and uses it to retire stock until its capital structure is 40% debt assuming EBIT remains unchanged and the stock continues to sell at its book value. (Develop the second column of the chart shown.)
Recalculate same figures assuming Findlay continues to restructure until its capital structure is 75% debt. (Develop the third column of the chart.) Current Capital Structure
10% Debt 40% Debt 75% Debt
Debt $10,000 $40,000 $75,000
Equity 90,000 60,000 25,000
Total Capital $100,000 $100,000 $100,000
Shares @ $5 18,000
EBIT $18,000
Interest ( 15%) 1,500
EBT $16,500
Tax (40%) 6,600
EAT $9,900
ROE
EPS
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