Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 15, Problem 1MC
Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company’s EBIT was $120 million last year and is not expected to grow. PizzaPalace is in the 25% state-plus-federal tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6 percent. The firm is currently financed with all equity, and it has 10 million shares outstanding.
When you took your
- a. Using the
free cash flow valuation model, show the only avenues by which capital structure can affect value.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company’s EBIT was $120 million last year and is not expected to grow. PizzaPalace is in the 25% state-plus-federal tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6 percent. The firm is currently financed with all equity, and it has 10 million shares outstanding.
When you took your corporate finance course, your instructor stated that most firms’ owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. If the company were to recapitalize, then debt would be issued, and the funds received would be used to repurchase stock. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:
Percent Financed with Debt, Wd
Rd
0%
20%
8.0%
30%
8.5%
40%
10.0%…
Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company’s EBIT was $120 million last year and is not expected to grow. PizzaPalace is in the 25% state-plus-federal tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6 percent. The firm is currently financed with all equity, and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firms’ owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. If the companywere to recapitalize, then debt would be issued, and the funds received would be used to repurchase stock. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:Percent Financedwith Debt, wd rd0%…
Assume you have just been hired as a business manager of Arnie’s Artichokes a regional health food restaurant chain. The company’s EBIT was $80 million last year and is not expected to grow. The firm is currently financed with all equity and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firm’s owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:
% Financed With Debt rd
0% ---
25 9.0%…
Chapter 15 Solutions
Financial Management: Theory & Practice
Ch. 15 - Prob. 1QCh. 15 - What term refers to the uncertainty inherent in...Ch. 15 - Firms with relatively high nonfinancial fixed...Ch. 15 - “One type of leverage affects both EBIT and EPS....Ch. 15 - Why is the following statement true? Other things...Ch. 15 - Why do public utility companies usually have...Ch. 15 - Why is EBIT generally considered to be independent...Ch. 15 - If a firm went from zero debt to successively...Ch. 15 - Prob. 9QCh. 15 - Prob. 1P
Ch. 15 - Counts Accountings beta is 1.2 and its tax rate is...Ch. 15 - Ethier Enterprise has an unlevered beta of 1.0....Ch. 15 - Quillpen Company is unlevered and has a value of...Ch. 15 - Walkrun Inc. is unlevered and has a value of 400...Ch. 15 - Cruz Corporation has 100 billion of debt...Ch. 15 - Nichols Corporations value of operations is equal...Ch. 15 - Lee Manufacturings value of operations is equal to...Ch. 15 - Dye Trucking raised $150 million in new debt and...Ch. 15 - Schweser Satellites Inc. produces satellite earth...Ch. 15 - The Rivoli Company has no debt outstanding, and...Ch. 15 - Pettit Printing Company (PPC) has a total market...Ch. 15 - Beckman Engineering and Associates (BEA) is...Ch. 15 - F. Pierce Products Inc. is considering changing...Ch. 15 - A. Fethe Inc. is a custom manufacturer of guitars,...Ch. 15 - Start with the partial model in the file Ch15 P13...Ch. 15 - Assume you have just been hired as a business...Ch. 15 - Prob. 2MCCh. 15 - Prob. 3MCCh. 15 - To illustrate the effects of financial leverage...Ch. 15 - What happens to ROE for Firm U and Firm L if EBIT...Ch. 15 - What does capital structure theory attempt to do?...Ch. 15 - Prob. 7MCCh. 15 - Liu Industries is a highly levered firm. Suppose...Ch. 15 - How do companies manage the maturity structure of...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Suppose you are the president of a large corporation located in Seattle, Washington. How do you think the stockholders will react if you decide to increase the proportion of the company’s assets that is financed with debt from 35 percent to 50 percent? In other words, what if the firm used much more debt to finance its assets?arrow_forwardYou have been asked by your employers to demonstrate your knowledge in business valuation process, by analyzing the value of Best Group Savings and Loans Company (BGSLC). The company paid a dividend of GH¢ 250,000 this year. The current return to shareholders of companies in the same industry as BGSLC is 12%, although it is expected that an additional risk premium of 2% will be applicable to BGSLC, being a smaller and unquoted company. Compute the expected valuation of BGSLC, if: The current level of dividend is expected to continue into the foreseeable future The dividend is expected to grow at a rate 4% par into foreseeable future The dividend is expected to grow at a 3% rate for three years and 2% afterwardsarrow_forwardAssume you have just been hired as business manager of EdiPizza, a pizza restaurant located adjacent to campus. The company’s EBIT was GH¢500,000 last year, and since the university’s enrollment is capped, EBIT is expected to remain constant (in real terms) over time. Since no expansion capital will be required, EdiPizza plans to pay out all earnings as dividends. The management group owns about 50% of the stock, and the stock is traded in the over-the counter-market. The firm is currently financed with all equity; it has 100,000 shares outstanding; and price of stock is GH¢25 per share. When you took your MBA corporate finance course, your instructor stated that most firms’ owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures: Percent…arrow_forward
- Assume you have just been hired as business manager of EdiPizza, a pizza restaurant located adjacent to campus. The company’s EBIT was GH¢500,000 last year, and since the university’s enrollment is capped, EBIT is expected to remain constant (in real terms) over time. Since no expansion capital will be required, EdiPizza plans to pay out all earnings as dividends. The management group owns about 50% of the stock, and the stock is traded in the over-the counter-market. The firm is currently financed with all equity; it has 100,000 shares outstanding; and price of stock is GH¢25 per share. When you took your MBA corporate finance course, your instructor stated that most firms’ owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:…arrow_forwardYou are the financial planner for Johnson Controls. Assume last year's profits were $880,000. The board of directors decided to forgo dividends to stockholders and retire high-interest outstanding bonds that were issued 6 years ago at a face value of $1,490,000. You have been asked to invest the profits in a bank. The board must know how much money you will need from the profits earned to retire the bonds in 8 years. Bank A pays 6% compounded quarterly, and Bank B pays 7% compounded annually. (Use Table 1 and Table 2 provided.) Note: Do not round intermediate calculations. Round your answers to the nearest dollar amount. a-1. Which bank would you recommend? Bank A Bank B a-2. How much of the company's profit should be placed in the bank? Profit b. If you recommended that the remaining money not be distributed to stockholders but be placed in Bank B, how much would the remaining money be worth in 8 years? Future Valuearrow_forwardAssume you have just been hired as business manager of EdiPizza, a pizza restaurant located adjacent to campus. The company’s EBIT was GH¢ 500,000 last year, and since the university’s enrollment is capped, EBIT is expected to remain constant (in real terms) over time. Since no expansion capital is required, EdiPizza plans to pay out all earnings as dividends. The management group owns about 50% of the stock, and the stock is traded in the over-the-counter-market. The firm is currently financed with all equity; it has 100,000 shares outstanding; and price of stock is GH¢25 per share. When you took your MBA corporate finance course, your instructor stated that most firms’ owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures: Percent…arrow_forward
- Please assist with the formulas for the associated problem. Thanks so much!arrow_forwardAssume you have just been hired as business manager of Sunbucks, a coffee shop located adjacent to campus. The firm is currently financed with 90% equity and 10% debt; it has 50,000 shares outstanding; and PO = $9.93 per share. The management group owns about 50 percent of the stock, and the stock is traded in the over-the-counter market. The company's EBIT was $100,000 last year, and since the university's enrollment is capped, EBIT is expected to remain constant (in real terms) over time. Since no expansion capital will be required, Sunbucks plans to pay out all earnings as dividends. You suggested to your new boss that the firm should engage in a capital restructure by issuing more debt and use the proceeds to repurchase stocks. Your boss encouraged you to pursue the idea. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures: % Financed With Debt Rd 0% --- 10 9% 45 9.5% 60 14%…arrow_forward2. A venture capitalist wants to invest $1,000,000 in your company Chatt-Town Industries. You do not expect to make a profit until year four when your net income (profit) is expected to be $3,000,000. The common stock of Nash-Vegas Corporation, a "comparable" firm, currently trades in the over-the- counter market at $8 per share. Nash-Vegas's net income (profit) for the most recent year was $1,000,000 and the firm has 500,000 shares of common stock outstanding (for a market capitalization of $4,000,000). Apply the VC method to determine the value of the Chatt-Town Industries at the end of four years. A. What is the comparable firm's earnings per share (EPS)?arrow_forward
- Please help with the formulas that are used in this problem. Thanks!arrow_forwardAssume that you have just been hired as business manager of Campus Deli(CD), which is located adjacent to the campus. Its Free Cash Flow(FCF) is $30,000. Because the university’s enrollment is capped, FCF is expected to be constant over time. Because no expansion capital is required, CD pays out all earnings as dividends. CD currently has no debt—it is an all-equity firm—and its 100,000 shares outstanding. The firm’s federal-plus-state tax rate is 40%.On the basis of statements made in your finance text, you believe that CD’s shareholders would be better off if some debt financing was used. When you suggested this to your new boss, she encouraged you to pursue the idea but to provide support for the suggestion.In today’s market, the risk-free rate is 6% and the market risk premium is 6%. CD’s unlevered beta is 1.0. CD currently has no debt, so its cost of equity (and WACC) is 12%. If the firm was recapitalized, debt would be issued and the borrowed funds would be used to repurchase…arrow_forwardAs a financial analyst at JPMorgan Chase, you are analyzing the impact of debt on the value of the firm. Suppose BAC Company has no debt in its capital structure. The company is valued at $300 million. Assume the corporate tax rate is 20%. a. What would be the value of tax shield if it issued $100 million in perpetual debt and repurchased the equity? (sample answer: 200.40) b. What would be the value of the firm if it issued $100 million in perpetual debt and repurchased the equity? ( sample answer: 200.40)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
How To Analyze an Income Statement; Author: Daniel Pronk;https://www.youtube.com/watch?v=uVHGgSXtQmE;License: Standard Youtube License