Various capital structures Charter Enterprises currently has $1.7 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of thefollowing debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, and 90%. (Note: The amount of total assets would not change.) Is there a limit to the debt ratio's value?Calculate the capital structure below: (Round to the nearest dollar.)EquityDebt Ratio10%$Debt$C

The capital structure consists of both debt and equity. The management decides how much debt it…

Answered: Various capital structures Charter…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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GPR is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, GPR would have 178,500 shares of stock outstanding. Under Plan II, there would be 71,400 shares of stock outstanding and $1.79 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes. The projected EBIT is $280,000. Which capital structure plan would you prefer, if you were a shareholder in the firm? Support your response with relevant computations
You are given the following information concerning a firm:Assets required for operation: $5,100,000Revenues: $8,400,000Operating expenses: $7,850,000Income tax rate: 40%. Management faces three possible combinations of financing: 100% equity financing 30% debt financing with a 8% interest rate 60% debt financing with a 8% interest rate What is the net income for each combination of debt and equity financing? Round your answers to the nearest dollar. 1 2 3 Net income $ $ $ What is the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. 1 2 3 Return on equity % % % If the interest rate had been 16 percent instead of 8 percent, what would be the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. 1 2 3 Return on equity % % % What is the implication of the use of financial leverage…
The finance director of Netra co wishes to estimate what impact the introduction of debt finance is likely to have on the company’s overall cost of capital. The company is currently financed only by equity. Ordinary Shares ( 25 cents par value ) 500,000 Reserves 1,100,000 Total Equity 1,600,000 The company’s current share price is 420 cents, and up to $4 million of fixed rate five year debt could be raised at an interest rate of 10% per year. The corporate tax rate is 33%.The current earnings before interest and tax are $2.5 million. These earnings are not expected to change significantly for the foreseeable future. The company is considering raising either: a) $2 million in debt finance; or b) $4 million in debt finance In either case the debt finance will be used to repurchase ordinary shares. Required: i) Using Modigliani and Miller’s model in a world with corporate tax, estimate…
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B.F. Pierce & Company is considering changing its capital structure. The company currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: 8.66% 9.21% 8.83% Market Debt-to- Value Ratio 9.07% (WD) 0.00 0.20 0.40 0.60 0.80 Market Equity-to- Value Ratio (WE) 1.00 0.80 0.60 0.40 0.20 Market Debt-to- Equity Ratio (D/E) 0.00 0.25 0.67 1.50 4.00 Before-Tax Cost of Debt (rD) 5.00% The company uses the CAPM to estimate its cost of common equity. Currently the risk-free rate is 4%, the market risk premium is 6%, and the company's tax rate is 25%. The company estimates that its beta now (which is unlevered because it currently has no debt) is 0.8. Based on this information, what is the firm's weighted average cost of capital at its optimal capital structure? 6.00% 7.00% 8.00% 9.00%
You are given the following information concerning a firm: Assets required for operation: $5,000,000 Revenues: $8,400,000 Operating expenses: $7,900,000 Income tax rate: 40%. Management faces three possible combinations of financing: 100% equity financing 30% debt financing with a 6% interest rate 60% debt financing with a 6% interest rate What is the implication of the use of financial leverage when interest rates change?
Ace Enterprises Limited is a large company involved in production and sale of petroleum products. The Finance Department of the company is trying to determine the company’s optimal capital structure. The firms’ financial advisors have developed the following table: Equity Ratio Debt Ratio Before Tax Cost of Debt 100% 0% 7% 80% 20% 8% 60% 40% 10% 40% 60% 12% 20% 80% 15% The company uses and applies the Capital Assets Pricing Model to estimate its cost of common equity. The company estimates that the risk free rate is 4.0%. The market risk premium is 6.0%, and its tax rate is 30 percent. The company estimates that if it had no debt, its unlevered beta would be 1.2. Required: A. Based on the above information, what is the firm’s optimal capital structure? B. What would the weighted average cost of capital be at the optimal capital structure? C. If a firm went from zero debt to successively higher levels of debt, why would you expect its stock price to first rise, then hit…
American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently it targets a 50-50mix of debt and equity, but it is considering a target capital structure with 90% debt. American Exploration currently has 7% after-tax cost of debt and a 14% cost of common stock. The company does not have any preferred stock outstanding. a. What is American Exploration's current WACC? b. Assuming that its cost of debt and equity remain unchanged, what will be American Exploration's WACC under the revised target capital structure? c. Do you think shareholders are affected by the increase in debt to 90%? If so, how are they affected? Are the common stock claims riskier now?
fin320 (Capital structure analysis)The Karson Transport Company currently has net operating income of $494,000 and pays interest expense of $194,000. The company plans to borrow $1.05 million on which the firm will pay 12 percent interest. The borrowed money will be used to finance an ivestment that is expected to increase the firm's net operating income by $397,000 a year. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? The times interest earned ratio is ___times. (Round to two decimal places.) What effect will the loan and the investment have on the firm's times interest earned ratio? The new times interest earned ratio ___times. (Round to two decimal places.)
Orange Company was contemplating two (2) capital structure choices. The CFO should choose the optimal capital structure that the company must implement; this decision should maximize the stock price. To do so, the CFO must first perform calculations using data obtained from the company: Plan Alpha 20% debt & 80% equity Wd=20%, Wc= 80% Cost of debt (rd)= 12% Tax rate= 30% bL=1.2 Risk Premium (RP)=4% Risk-free rate (rf)= 6% rs=? WACC=? Plan Omega 30% debt & 70% equity Wd=30%, Wc= 70% Cost of debt(rd)= 10% Tax rate= 30% bL=1.5 Risk Premium (RP)=5% Risk-free rate (rf)= 8% rs=? WACC=? *Hint: Compute for the rs first before computing the WACC.
Albrecht Inc. is a no-growth firm whose sales fiuctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital? a $274.360 b. $260,642 c. $304,000 d. $320,000 e. $288,800
An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 9.00 percent, and the cost of common equity (in the form of retained earnings) is 17.00 percent. b. Recalculate the firm's weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Debt Common equity Weighted average cost of capital Weighted Cost % 0.00 %

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