Company P is a regional pizza restaurant chain. The given details are as follows, EBIT is $120 million, Tax rate is 25%, Risk-free rate of return is 6%, Market risk premium is 6%, Outstanding shares 10 million. As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock. To discuss: Empirical evidences on capital structure and implications for managers.

Question

Why do you think capital investment decisions are some of the most important decisions that management makes?

Answer 1

Question

Chapter 15, Problem 7MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To discuss: Empirical evidences on capital structure and implications for managers.

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Answer 2

Question

Chapter 15, Problem 7MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To discuss: Empirical evidences on capital structure and implications for managers.

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Answer 3

Question

Chapter 15, Problem 7MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To discuss: Empirical evidences on capital structure and implications for managers.

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Answer 4

Question

Chapter 15, Problem 7MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To discuss: Empirical evidences on capital structure and implications for managers.

Expert Solution & Answer

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Answer 5

Chapter 15, Problem 7MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To discuss: Empirical evidences on capital structure and implications for managers.

Answer 6

Chapter 15, Problem 7MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To discuss: Empirical evidences on capital structure and implications for managers.

Answer 7

Chapter 15, Problem 7MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $120 million,

Tax rate is 25%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To discuss: Empirical evidences on capital structure and implications for managers.

Answer 8

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Answer 19

Ch. 15 - Prob. 1Q Ch. 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. 9Q Ch. 15 - Prob. 1P

Solution Summary: The author explains how a regional pizza restaurant chain raises capital by using debt. Tax benefits are important, while bankruptcies are costly.

Chapter 15 Solutions