Fundamentals of Financial Management (MindTap Course List)
14th Edition
ISBN: 9781285867977
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 14, Problem 10Q
Summary Introduction
To identify: Whether the optimal capital structure after the breakup is same as the pre-breakup optimal capital structure.
Introduction:
Capital Structure:
Capital structure refers to the securities or debt included in the total capital of the firm. Optimum capital structure is required for the optimum utilization of funds.
Answer:
No, the optimal capital structure after the breakup is not same as the pre-breakup optimal capital structure.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
When the Bell System was broken up, the old AT&T was split into a new AT&T and seven regional telephone companies. The specific reason for forcing the breakup was to increase the degree of competition in the telephone industry. AT&T had a monopoly on local service, long distance, and the manufacture of all equipment used by telephone companies; and the breakup was expected to open most of those markets to competition. In the court order that set the terms of the breakup, the capital structures of the surviving companies were specified and much attention was given to the increased competition telephone companies could expect in the future. Do you think the optimal capital structure after the breakup was the same as the pre-breakup optimal capital structure? Explain your position
Charging Corporation and Sparking Electrical Company are competitors in the business of electrical components distribution. Sparking is the smaller firm and has attracted the attention of the management of Charging, for Sparking has taken away market share from the larger firm by increasing its sales force over the past few years. Charging is considering a takeover offer for Sparking and asked you to serve on the acquisition valuation team that will turn into due diligence team if an offer is made and accepted. Given the financial information and proposal assumptions that follows, how would you respond to (a) and (b)?
Sparking Electrical Company
Condensed Income Statement
Previous five years (in $ million)
2009
2008
2007
2006
2005
Revenues
1,626.50
1614.10
1485.20
1380.50
1373.40
– Cost of goods sold
1,488.10
1490.90
1359.50
1271.40
1268.00
Gross profits
138.40…
Pls select the correct option and explain it.
Chapter 14 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 14 - Changes in sales cause changes in profits. Would...Ch. 14 - Would each of the following increase, decrease, or...Ch. 14 - Discuss the following statement: All else equal,...Ch. 14 - Prob. 4QCh. 14 - Prob. 5QCh. 14 - Why do public utilities generally use different...Ch. 14 - Why is EBIT generally considered independent of...Ch. 14 - Is the dept level that maximizes a firms expected...Ch. 14 - If a firm goes from zero dept to successively...Ch. 14 - Prob. 10Q
Ch. 14 - A firm is about to double its assets to serve its...Ch. 14 - Prob. 1PCh. 14 - Prob. 2PCh. 14 - Prob. 3PCh. 14 - UNLEVERED BETA Harley Motors has 10 million in...Ch. 14 - FINANCIAL LEVERAGE EFFECTS Firms HL and LL are...Ch. 14 - BREAK-EVEN ANALYSIS The Weaver Watch Company sells...Ch. 14 - Prob. 7PCh. 14 - HAMADA EQUATION Cyclone Software Co. is trying to...Ch. 14 - RECAPITALIZATION Tapley Inc. currently has total...Ch. 14 - BREAKEVEN AND OPERATING LEVERAGE a. Given the...Ch. 14 - RECAPITALIZATION Currently, Bloom Flowers Inc. has...Ch. 14 - BREAKEVEN AND LEVERAGE Wingler Communications...Ch. 14 - FINANCING ALTERNATIVES The Severn Company plans to...Ch. 14 - WACC AND OPTIMAL CAPITAL STRUCTURE Elliott...Ch. 14 - OPTIMAL CAPITAL STRUCTURE Assume that you have...Ch. 14 - Prob. 1TCLCh. 14 - Exploring the Capital Structures for Four...
Knowledge Booster
Similar questions
- ABC Corporation is the sole_providerof a particular service.in-the country.The government has-opened themarket for another competitorthrough an anti-monopoly law. Whatshould ABC-do? A. Assess how this would affect the business and determine whether it can improve production processes, lower costs, and improve its service.B. Purchase all available raw materials and prevent the competitor from having smooth operations.C. Identify its rights in the constitution to prevent the new competitor to exist.D. Reduce negative environmental and community impact through corporate social responsibility and persuade the government to not implement the law.arrow_forwardSome years ago T-Mobile (cell phone service provider) and Sprint (another cell phone service provider) merged (the current T-Mobile is the result of that merger). (a) Was this merger a horizontal merger or a vertical merger? Please give an explanation. (b) Why do the merger were for the two companies)? Please give an explanation. you think T-Mobile and Sprint decided to merge (what do you think the benefits ofarrow_forwardChoose all that are not appropriate statements regarding business combinations and divestures. 1. A businesses that is in an industry where economies of scale is observed have an incentive to enlarge its operation through a merger. 2. A corporation is sometimes forced to divest a part of its business due to its excessive market power. 3. Two corporations that are planning to merge as equal partners should create a new legal entity (a "business combination") because that would be less costly than absorbing one corporation into another (an "absorption"). 4. A corporation seeking to acquire another corporation can do so by buying shares of the target through the open market. 5. The board of a corporation that have agreed to merge with another corporation should categorically reject a merger offer from another corporation because that would result in a breach of contract for the first merger agreement.arrow_forward
- Catron Corporation is having liquidity problems, and as a result, it sells all of its outstanding stock to Lambert, Inc., for cash. Because of Catron’s problems, Lambert is able to acquire this stock at less than the fair value of the company’s net assets. How is this reduction in price accounted for within the consolidation process?arrow_forwardThe Blumen Yacht Building Company buys Marine Parts Corporation, a furm that makes shipbuilding components, despite the opposition of Marine's board of directors and its top management. This is an example of a(n) a) accommodation b) divestiture C merger )d) hostile takeoverarrow_forwardAdvise the finance director of FXL Bank of the requirements of AASB10 in respect of the control criterion. Indicate where the control rests and whether or not consolidation will be required. ZXY Pty Ltd is a family run book publishing company that has purposely refrained from using high technology equipment over the past five years as the directors considered it to be a 'fad' and a waste of the company's resources. As a result, the company's antiquated equipment has failed to produce quality material and has been very inefficient compared with ZYX's competitors. During the current year, the company's bank (FXL Bank) too possession of the company's assets, converted all the debt into equity, and two directors of the bank were appointed to ZYX's board, which now totals four people. The bank is undecided whether to sell the company's assets, which have little recoverable value or inject further equity into the company, purchase more advanced equipment and attempt to trade on and sell the…arrow_forward
- Find a recent merger transaction that failed due to regulatory concerns over market share concentration and reduction of consumer alternatives. Do you support the regulatory concerns? Explain briefly the transaction and your reasoning.arrow_forwardTwo large, publicly owned firms are contemplating a merger. No operating synergy isexpected. However, because returns on the two firms are not perfectly positively correlated,the standard deviation of earnings would be reduced for the combined corporation. Onegroup of consultants argues that this risk reduction is sufficient grounds for the merger.Another group thinks that this type of risk reduction is irrelevant because stockholders canhold the stock of both companies and thus gain the risk-reduction benefits without all thehassles and expenses of the merger. Whose position is correct? Explain.arrow_forwardWhich of the following LEAST accurately describes the advantages of specific types of mergers and acquisitions?a. The catch-all term for the benefits from M&As is synergy.b. A diversified group of business may further acquire other businesses in a conglomerate type of acquisition.c. The acquisition of an entity outside the industry and supporting services will result to decrease in cost of production of the acquirer.d. Financial advantages of M&A include decreased operating costs, increased financial capacity, and combined sales.arrow_forward
- Multinational corporations are exposed to higher risks that primarily come from two significant sources: (1) exchange rate risk and (2) political or country risk. An example of would be having property expropriated without adequate compensation. Which of the following are steps a company can take to reduce potential loss from expropriation? Check all that apply. Finance the subsidiary with local capital which reduces the local government's incentive to expropriate the multinational company's property. O Lock in the dollar return by selling currency in the forward market. Structure operations so that the subsidiary is only valuable as a part of the integrated corporate system. This reduces the risk exposure for the integrated company.arrow_forwardASSIGNMENT TWODazzle Co. is a stock‐market listed company that manufactures personal protection equipment. At a recent board meeting of Dazzle Co., a non‐executive director suggested that the company’s remuneration committee should consider scrapping the company’s current share option scheme, since executive directors could be rewarded by the scheme even when they did not perform well. A second non‐executive director disagreed, saying the problem was that even when directors acted in ways which decreased the agency problem, they might not be rewarded by the share option scheme if the stock market were in decline. Required:(a) Explain the nature of the agency problem in detail. (b) Discuss the use of share option schemes as a way of reducing the agency problem in a stock‐market listed company such as Dazzle Co.arrow_forwardThe complexity posed by differences in the cultural, political, legal, and economic environments creates a so-called “liability of foreignness.” This idea holds that foreign companies, because of their poorer familiarity with local conditions, incur additional costs. In theory, the liability of foreignness makes IB activity too expensive. In practice, companies offset this liability by capitalizing on their unique advantages as well as selecting the mode of international business that best reflects their resource profile and risk tolerance--Always in the effort toward minimizing the intrinsic higher costs of international operations. The higher costs of international operations, executives point out, are driven by things as varied as the cost of legally establishing businesses, real estate costs, customs duties, and translation costs. Managing these costs is complicated by the report that _53_______%___ of global CEOs are concerned about the impact of __bribery and…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Business Its Legal Ethical & Global EnvironmentAccountingISBN:9781305224414Author:JENNINGSPublisher:Cengage
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning- Business/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:Cengage
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Business Its Legal Ethical & Global Environment
Accounting
ISBN:9781305224414
Author:JENNINGS
Publisher:Cengage
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Business/Professional Ethics Directors/Executives...
Accounting
ISBN:9781337485913
Author:BROOKS
Publisher:Cengage
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT