Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 2, Problem 2.2WUE
Summary Introduction
To discuss:
Difference between raising capital through a financial institution and directly from a financial market.
Introduction:
Financial institutions are the institutions that act as intermediaries between the suppliers and demanders of funds in the financial system.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
You work for the CEO of a new company that plans to manufacture and sell a new type of laptop
computer. The issue now is how to finance the company, with only equity or with a mix of debt and
equity. Expected operating income is $810,000. Other data for the firm are shown below. How much
higher or lower will the firm's expected EPS be if it uses some debt rather than only equity, i. e., what is
EPSL - EPSU? 0% Debt, U 60% Debt, L Oper. income (EBIT) $810,000 $810,000 Required investment $
2,500,000 $2,500,000 % Debt 0.0% 60.0% $ of Debt $0.00 $1,500,000 $ of Common equity $2,500,000 $
1,000,000 Shares issued, $10/share 250,000 100, 000 Interest rate NA 10.00% Tax rate 25% 25% a. $0.75 b. $
2.52 c. $3.36 d. $4.10 e. $2.90
Texo Enterprises is a relatively small and new business firm and you have been appointed as their new Finance Manager. What are your expected functions of this new position?
Suppose that you are appointed as a finance executive of a dairy product Company of UAE.
How you will design the capital structure of the company if company needs to raise capital
from $200,000 to $8,00,000 with the mix of Equity and Debt. Determine the EPS in each case
and evaluate the best possible actions for the company. During the production process if
company needs to raise $ 300,000 more capital then which option suits to company? Through
Debt or Equity? Justify your answer in context to the theory of financial intermediation to the
mistion
Chapter 2 Solutions
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Ch. 2.1 - Prob. 1FOPCh. 2.1 - Prob. 1FOECh. 2.1 - Prob. 2FOECh. 2.1 - Prob. 2.1RQCh. 2.1 - What role do financial markets play in our...Ch. 2.1 - Prob. 2.3RQCh. 2.1 - Prob. 2.4RQCh. 2.1 - Prob. 2.5RQCh. 2.1 - Prob. 2.6RQCh. 2.1 - Prob. 2.7RQ
Ch. 2.2 - Prob. 2.8RQCh. 2.2 - What is a mortgage-backed security? What basic...Ch. 2.2 - Prob. 2.10RQCh. 2.2 - Why do falling home prices create an incentive for...Ch. 2.2 - Why does a crisis in the financial sector spill...Ch. 2.3 - Prob. 2.13RQCh. 2.3 - Prob. 2.14RQCh. 2.4 - Prob. 2.15RQCh. 2.4 - Prob. 2.16RQCh. 2.4 - Prob. 2.17RQCh. 2 - Prob. 1ORCh. 2 - Prob. 2.1STPCh. 2 - Prob. 2.1WUECh. 2 - Prob. 2.2WUECh. 2 - Prob. 2.3WUECh. 2 - Your broker calls to offer you the investment...Ch. 2 - Prob. 2.5WUECh. 2 - Prob. 2.6WUECh. 2 - Prob. 2.1PCh. 2 - Prob. 2.2PCh. 2 - Prob. 2.3PCh. 2 - Prob. 2.4PCh. 2 - Prob. 2.5PCh. 2 - Prob. 2.6PCh. 2 - Prob. 2.7PCh. 2 - Prob. 2.8PCh. 2 - Prob. 1SECh. 2 - Integrative Case 1 Merit Enterprise Corp. Sara...
Knowledge Booster
Similar questions
- You work for the CEO of a new company that plans to manufacture and sell a new product, a watch that has an embedded TV set and a magnifying glass crystal. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is P400,000. Other data for the firm are shown below. How much higher or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.e., what is ROEL − ROEU?arrow_forward1. Financial institutions in the U.S. economy Suppose Tyler decides to use $9,500 currently held as savings to make a financial investment. One method of making a financial investment is the purchase of stock or bonds from a private company. Suppose Arcadia, a biomedical research firm, is selling stocks to raise money for a new lab. This practice is called finance. Buying a share of Arcadia stock would give Tyler the firm. In the event that Arcadia runs into financial difficulty, will be paid first. Suppose Tyler chooses to buy 250 shares of Arcadia stock. Which of the following statements are correct? Check all that apply. Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Tyler's shares to decline. An increase in the perceived profitability of Arcadia will likely cause the value of Tyler's shares to rise. The Dow Jones Industrial Average is an example of a stock exchange where he can purchase Arcadia stock. Alternatively, Tyler…arrow_forwardAssume that you recently graduated with a degree in finance and have just reported to work as financial adviser at the brokerage firm of Capital Asas Berhad, Your first assignment is to explain nature of the Malaysian financial markets to Martin Johnson, a potential investor. He expects to invest substantial amounts of money through Capital Asas Berhad. He is very optimistic; therefore, he would like to understand in general terms what will happen to her money. Your supervisor has developed the following questions that you must use to explain the Malaysian financial system to Johnson. A) Describe the difference between market and financial market.arrow_forward
- Suppose Clinton decides to use $7,500 currently held as savings to make a financial investment. One method of making a financial investment is the purchase of stock or bonds from a private company. finance. Buying a share of Suppose Bayzer, a pharmaceutical firm, is selling stocks to raise money for a new lab. This practice is called Bayzer stock would give Clinton the firm. In the event that Bayzer runs into financial difficulty, will be paid first.arrow_forwardAn investor is considering starting a new business. The company would require $475,000 of assets, and itwould be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business? Please show work in excelarrow_forwardYou have a successful shop and feel that the demand for your shop has outpaced your capacity. You have decided to pitch your idea to a venture capitalist (VC). You brought in your income statement as you highlight that last year your gross profit was $500,000. the VC tells you that number is pointless. He asks you for your net profit. What information was the VC looking for? Why?arrow_forward
- 4. You work for the CEO of a new company that plans to manufacture and sell a new product, a watch that has an embedded TV set and a magnifying glass crystal. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $500,000. Other data for the firm are shown below. How much higher or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.e., what is ROEL - ROEU? Do not round your intermediate calculations. 0% Debt, U 60% Debt, L $500,000 $2,500,000 Oper. income (EBIT) Required investment % Debt $ of Debt $ of Common equity $500,000 $2,500,000 0.0% 60.0% $0.00 $1,500,000 $1,000,000 $2,500,000 NA Interest rate 10.00% Tax rate 35% 35% a. 11.21% b. 8.29% c. 9.75% d. 11.70% e. 8.78%arrow_forward1. Financial institutions in the U.S. economy Suppose Andrew would like to use $3,000 of his savings to make a financial investment. One way of making a financial investment is to purchase stock or bonds from a private company. Suppose TouchTech, a hand-held computing firm, is selling stocks to raise money for a new lab-a practice known as finance. Buying a share of Touch Tech stock would give Andrew the firm. In the event that TouchTech runs into financial difficulty, will be paid first. Suppose Andrew decides to buy 100 shares of TouchTech stock. Which of the following statements are correct? Check all that apply. TouchTech earns revenue when Andrew purchases 100 shares, even if he purchases them from an existing shareholder. The price of his shares will rise if TouchTech issues additional shares of stock. Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Andrew's shares to decline. Alternatively, Andrew could make a financial…arrow_forwardDavid Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: e. Suppose the expected free cash flow for Year 1 is 250,000 but it is expected to grow faster than 7% during the next 3 years: FCF2 = 290,000 and FCF3 = 320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is 128,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be 152,000, at Year 3 it will be 192,000 and it will grow at 7% thereafter. What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)? What is the current unlevered value of operations? What is the horizon value of the tax shield at Year 3? What is the current value of the tax shield? What is the current total value? The tax rate and unlevered cost of equity remain at 25% and 14%, respectively.arrow_forward
- Suppose your company has prolonged period of profits that creates a positive cashflow but you see the need to buy new equipment to sustain growth and you also have employees who are giving their best that must be rewarded. In addition, banks are courting you to avail of their corporate loan but you know for a fact that you have substantial amount of cash. How do you handle this situation?arrow_forwardYou begin a new job at Cabrera Medical Supplies. The company is considering a new accounting system, with an initial investment of about half a million dollars for new software and hardware. You are excited for the opportunity to apply your managerial accounting skills regarding screening and preference methods to decide on the best system for the company. Your boss is a little old-school, and when you mention some of the things you learned in managerial accounting, he says, “Discounted cash flow methods are not the only way to approach this. I have more of a gut reaction approach that blows most managers out of the water when they become absorbed by discounted cash flow methods (DCF).” How would you react and what would you discuss with your boss?arrow_forward1. Cost of money Everyone uses money, and it is important to understand what factors affect the cost of money. Consider the following scenario: A friend comes to you and asks you to invest in his business instead of investing in Treasury bonds. You think he has a good business model, so you tell him you are willing to invest as long as the expected return on the investment is at least four times the return you would have received on the Treasury bonds. Determine which of these fundamental factors is affecting the cost of money in the scenario described: Risk Inflation Time preferences for consumptionarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax CollegeEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT