EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Chapter 19, Problem 2P
Summary Introduction

To determine: The production capacity.

Introduction:

The business plan is a necessary tool for the firm to analyze and take decisions on the current and future events. The firm must concentrate on the investments, capital structure, and operations to improve its potentials and future growth of the business.

Summary Introduction

To discuss: The year in which the expansion is necessary.

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Delta Corporation has the following capital structure:                                                                                             Cost                          Weighted                                                                                        (after-tax)      Weights       Cost Debt                                                                                      8.1%          35%         2.84% Preferred stock (Kp)                                                             9.6               5              .48 Common equity (Ke) (retained earnings)                             10.1            60            6.06  Weighted average cost of capital (Ka)                                                                    9.38%                                                                                a. If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings?  b. The 8.1 percent cost of…
Dillon Enterprises has the following capDillon Enterprises has the following capital structure.  Debt ........................ 40% Common equity ....... 60 The after-tax cost of debt is 6 percent, and the cost of common equity (in the form of retained earnings) is 13 percent.  What is the firm’s weighted average cost of capital?  a. 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 after-tax cost of debt is 7 percent, and the cost of common equity (in the form of retained earnings) is 15 percent. Recalculate the firm’s weighted average cost of capital.   b. Which plan is optimal in terms of minimizing the weighted average cost of capital?
Compute Ke and Kn under the following circumstances: a. D1= $5, P0=$70, g=8%, F=$7 b. D1=$0.22, P0=$28, g=7%, F=2.50 c. E1 (earnings at the end of period one) = $7, payout ratio equals 40 percent, P0= $30, g=6%, F=$2,20. Note: D1 is the earnings times the payout rate. d. D0 (dividend at the beginning of the first period) = $6, growth rate for dividends and earnings (g)=7%, P0=$60, F=$3. You will need to calculate D1 (the dividend after the first period).
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