Understanding the optimal capital structureReview this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the followingfinancial information to help with the analysis.Debt Ratio30%40%50%60%70%Equity RatioConsider this case:70%60%50%40%30%TdTsWACC7.00%10.50%8.61%7.20% 10.80%8.21%7.70% 11.40% 8.01%8.90% 12.20% 8.08%10.30% 13.50% 8.38%Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure?Debt ratio = 40% ; equity ratio = 60%Debt ratio = 30% ; equity ratio = 70%Debt ratio50 % ; equity ratio = 50%Debt ratio60%; equity ratio = 40%Debt ratio70% ; equity ratio= 30%

A company needs capital to run its business. This is raised by way of debt and equity each of which…

Understanding the optimal capital structure Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the foll financial information to help with the analysis. Debt Ratio 30% 40% 50% 60% 70% Equity Ratio 70% 60% 50% 40% 30% Td T₁ WACC 7.00% 10.50% 8.61% 7.20% 10.80% 8.21% 7.70% 11.40% 8.01% 8.90% 12.20% 8.08% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio = 40% ; equity ratio = 60% Debt ratio = 30% ; equity ratio = 70% Debt ratio 50 % ; equity ratio = 50% O Debt ratio 60% ; equity ratio = 40% Debt ratio 70% ; equity ratio= 30%

Understanding the optimal capital structure Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the foll financial information to help with the analysis. Debt Ratio 30% 40% 50% 60% 70% Equity Ratio 70% 60% 50% 40% 30% Td T₁ WACC 7.00% 10.50% 8.61% 7.20% 10.80% 8.21% 7.70% 11.40% 8.01% 8.90% 12.20% 8.08% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio = 40% ; equity ratio = 60% Debt ratio = 30% ; equity ratio = 70% Debt ratio 50 % ; equity ratio = 50% O Debt ratio 60% ; equity ratio = 40% Debt ratio 70% ; equity ratio= 30%

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN:9781285867977

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter10: The Cost Of Capital

Section: Chapter Questions

Problem 3TCL: CALCULATING 3Ms COST OF CAPITAL In this chapter, we described how to estimate a companys WACC, which...

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Understanding the optimal capital structure Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio rdrd rsrs WACC 30% 70% 7.00% 10.50% 8.61% 40% 60% 7.20% 10.80% 8.21% 50% 50% 7.70% 11.40% 8.01% 60% 40% 8.90% 12.20% 8.08% 70% 30% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Transworld Consortium Corp.’s optimal capital structure? Debt ratio = 70%; equity ratio = 30% Debt ratio = 40%; equity ratio = 60% Debt ratio = 30%; equity ratio = 70% Debt ratio = 50%; equity ratio = 50% Debt ratio = 60%; equity ratio = 40% Consider this case: Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 60% equity and 40% debt. The firm’s cost of debt will be 8%, and…
4. Determining the optimal capital structure Understanding the optimal capital structure Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio 70% 60% 50% 40% 30% 30% 40% 50% 60% 70% Id Is WACC 7.00% 10.50% 8.61% 7.20% 10.80% 8.21% 7.70% 11.40% 8.01% 8.90% 12.20% 8.08% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Transworld Consortium Corp.'s optimal capital structure? Debt ratio = 60% ; equity ratio = 40% Debt ratio = 30%; equity ratio = 70% O Debt ratio = 40%; equity ratio = 60% O Debt ratio = 70% ; equity ratio = 30% O Debt ratio = 50% ; equity ratio = 50%
4. Determining the optimal capital structure Understanding the optimal capital structure Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio EPS DPS Stock Price 30% 70% 1.25 0.55 36.25 40% 60% 1.40 0.60 37.75 50% 50% 1.60 0.65 39.50 60% 40% 1.85 0.75 38.75 70% 30% 1.75 0.70 38.25 Which capital structure shown in the preceding table is Transworld Consortium Corp.’s optimal capital structure? Debt ratio = 30%; equity ratio = 70% Debt ratio = 40%; equity ratio = 60% Debt ratio = 50%; equity ratio = 50% Debt ratio = 60%; equity ratio = 40% Debt ratio = 70%; equity ratio = 30%
9. Determining the optimal capital structure Aa Aa Understanding the optimal capital structure Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio rd rs WACC 30% 70% 6.02% 9.40% 9.71% 40% 60% 6.75% 9.750% 9.55% 50% 50% 7.15% 10.60% 10.02% 60% 40% 7.55% 11.30% 10.78% 70% 30% 8.24% 12.80% 11.45% Which capital structure shown in the preceding table is Transworld Consortium Corp.'s optimal capital structure? Debt ratio = 70%; equity ratio = 30% Debt ratio = 40%; equity ratio = 60% Debt ratio 60%; equity ratio = 40% Debt ratio = 50%; equity ratio = 50% Debt ratio = 30%; equity ratio = 70% Consider this case: Globex Corp. currently has a capital structure consisting of 40% debt and 60% equity. However, Globex Corp.'s CFO has suggested that the firm increase its debt ratio to 50%. The current risk-free rate is 3.5%,…
Using CFO Sheila Dowling’s projected weighted-average-cost of capital (WACC) schedule, what discount rate would you choose? What flaws, if any, might be inherent in using the WACC as the discount rate?
CALCULATING 3Ms COST OF CAPITAL In this chapter, we described how to estimate a companys WACC, which is the weighted average of its costs of debt, preferred stock, and common equity. Most of the data we need to do this can be found from various data sources on the Internet. Here we walk through the steps used to calculate Minnesota Mining Manufacturings (MMM) WACC. 3. Next, we need to calculate MMMs cost of debt. We can use different approaches to estimate it. One approach is to take the companys interest expense and divide it by total debt (which is the sum of short-term debt and long-term debt). This approach only works if the historical cost of debt equals the yield to maturity in todays market (i.e., if MMMs outstanding bonds are trading at close to par). This approach may produce misleading estimates in years in which MMM issues a significant amount of new debt. For example, if a company issues a great deal of debt at the end of the year, the full amount of debt will appear on the year-end balance sheet, yet we still may not see a sharp increase in annual interest expense because the debt was outstanding for only a small portion of the entire year. When this situation occurs, the estimated cost of debt will likely understate the true cost of debt. Another approach is to try to find this number in the notes to the companys annual report by accessing the companys home page and its Investor Relations section. Alternatively, you can go to other external sources, such as bondsonline.com, for corporate bond spreads, which can be used to find estimates of the cost of debt. Remember that you need the after-tax cost of debt to calculate a firms WACC, so you will need MMMs tax rate (which has averaged around 30% in recent years). What is your estimate of MMMs after-tax cost of debt?
134 Richmond Clinic has obtained the f;llo i i : wing esti i of debt and equity at various capital structu?-cc:f e Percent Debt After-Tax Cost of Debt ~ Cost of Equity 0% = 16% 20 6.6% 17 40 7.8 19 60 10.2 22 80 14.0 27 What is the firm’s optimal capital structure? (Hint: Calculate its pital at each structure. Also, note that data on corporate cost of ca component costs at alternative capital structures are not reliable in real-world situations.) > e e 1Is daividend
What critique can say about this?
BIE The Cost of Capital: Weighted Averige cost of capital The firm's target capital structure is the mix of debt, presured stack, and common equity the firm plans to mise funds for future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these I components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common study then the cost of retained earnings is used in the firm's WACC calculation. However, if the firm will I have to issue new common stock, the cost of new common stock should be used in the firm's WALC calculation. Barton Industines expects that its target capital Structure for finds in the future for its raising capital budget will consist of 40% debt, 5% prefence stock, and 55% common equity. Note that the firm's marginal tax rate is 25%. Assume that the firm's cost of debt, rd is 10.0%, the firm's cost of preferred stock, rp is 9.2.%. and the firm's cost of…
a) Calculate the weighted average cost of capital using following information: Total Cost of debt 4.40%. = 0.78 • Income tax rate Value of total debt = 16,595,600 OMR • Value of total debt = 6,595,325 OMR • Cost of equity %3D = 9.17% . b) Why weighted average cost of capital is important for capital structure decision making?
1. Using the Capital Asset Pricing Model (CAPM), what's this company's cost of common equity? ·Expected market return = 10% Risk-free rate = 4% Beta = 1.3
6. Solving for the WACC The WACC is used as the discount rate to evaluate various capital budgeting projects. However, it is important to realize that the WACC is an appropriate discount rate only for a project of average risk. Analyze the cost of capital situations of the following company cases, and answer the specific questions that finance professionals need to address. Consider the case of Turnbull Co. Turnbull Co, has a target capital structure of 55% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2% of Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.0% its current tax rate is 25%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the…