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Concept explainers
Concept Introduction:
Bonds:
Bonds are debt instruments issued by the borrower company to its lenders. Bonds are issued at a specified rate of interest and for a specified time period. The bondholders get a fixed rate of interest on the bonds and repayment of the bonds at the maturity date. Bonds may be issued at a premium or discount.
Stocks (Common Stock and Preferred Stock):
There are two types of the share capital of a company. Common Stock represents the Common shares issued to the shareholders and preferred stock represents the
To Indicate:
If the advantages and disadvantages of issuing preferred stock and bonds
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Chapter 8 Solutions
Survey of Accounting (Accounting I)
- Question 1: What Would Your Accountant Say?Your company is considering raising capital for a new expansion project and the president has asked you to give a presentation to the Board of Directors on the risks and benefits of funding the project with debt versus equity financing. What would your accountant say to the Board?arrow_forwardAttached is a screenshot of a question I'm having some trouble understanding. Would it be possible for you to help me understand which of these options are correct and why the others would be incorrect, given the situation. According to the problem, it is possible for there to be multiple correct answers. Thank you!arrow_forwardBudget Wings Airlines is considering upgrading its fleet of aircraft as it expands from a regional airline to one offering service to a more nationwide portfolio of cities and airports. In support of this process, the CFO has asked you to determine the appropriate weighted average cost of capital (WACC) to use in the discounted cash flow analysis. You spend the morning gathering the following information: - Budget Wings has debt outstanding with a market value of $150 million. This debt is in the form of bonds that are currently priced at $946.33 per $1,000 face value and pay a coupon of 3.45%. The current yield-to-maturity (YTM) on these bonds is 4.11%. - Budget Wings stock is currently priced at $54.41 per share. You expect that next year's dividend will be $3.75 and you expect dividends to grow at 3%. The current market value of Budget Wings' common equity is $240 million. - Budget Wings has preferred equity outstanding with a market value of $30 million that offers an annual…arrow_forward
- (EBIT-EPS analysis) A group of retired college professors has decided to form a small manufacturing corporation that will produce a full line of traditional office furniture. The investors have proposed two financing plans. Plan A is an all-common-equity alternative. Under this agreement, 1 million common shares will be sold to net the firm $20 per share. Plan B involves the use of financial leverage. A debt issue with a 20-year maturity period will be privately placed. The debt issue will carry an interest rate of 10 percent, and the principal borrowed will amount to $6 million. The marginal corporate tax rate is 21 percent. a. Find the EBIT indifference level associated with the two financing proposals. b. Prepare a pro forma income statement that proves EPS will be the same regardless of the plan chosen at the EBIT level found in part a. c. Prepare an EBIT-EPS analysis chart for this situation. d. If a detailed financial analysis projects that long-term EBIT will always be close to…arrow_forwardCAPM & WACCarrow_forwardEvaluate whether using the cash raised by the rights issue to buy back bonds is likely to be financially acceptable to the shareholders of Squid Inc.arrow_forward
- 3) As a consultant to KLM Snow Sports Equipment, you have been asked to compute the appropriate discount rate to use to evaluate the purchase of anew warehouse facility. You have determined the market value of the firm's capital structure as follows:Source of Capital Market ValueBonds $600,000Preferred Stock $150,000Common Stock $450,000To finance the purchase, KLM will sell 20‐year bonds, with a 9% coupon rate and semiannual coupons, at the market price of $940. Flotation costs forissuing the bonds are 3 percent of the market price. Preferred stock paying an annual $3 dividend can be sold for $42; the cost of issuing these shares is$3 per share. Common stock for KLM is currently selling for $54 per share. The firm paid a $2.80 dividend last year and expects dividends to continuegrowing at a rate of 5 percent per year. Flotation costs for issuing new common stock will be 6 percent of the market price. The firm’s dividendscurrently equal the net income so there is no internal equity…arrow_forwardPhotochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .75. It’s considering building a new $76 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.4 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 6.3 percent of the amount raised. The required return on the company’s new equity is 12 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.8 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the…arrow_forwardBased on the information that you learned about capital structure and budgeting, determine what the optimal capital structure should be for Gentry. You will need to determine how much equity (common stock) the company will offer in the IPO and how much debt the company should assume in their global expansion to meet the goal of $50 million. Provide your recommendation in a 500-word APA formatted paper. Determine what capital structure will work best with your initial assessment. Describe the structure using the ratios. Include the dollar amount of equity (common stock) the company should issue in the IPO and how much debt the company should use for this expansion to reach the $50 million goal. Explain your rationale. Note: there is no single answer to the question of the firm's optimal capital structure. Your assessment is weighted more heavily toward your logical explanation rather than having the correct values for debt and equity.arrow_forward
- Just looking for the answer for "Then calculate expected EPS and oEPS under both debt and stock financing alternatives". Thanksarrow_forwardGalaxy Corporation is proposing a recapitalization that would increase its debt level and interest cost. The company will sell new bonds and repurchase shares of its common stock with the proceeds. According to the company's CFO, the initiative will not affect net assets or operating profits, but it will raise earnings per share (EPS). Which of the following statements is CORRECT, assuming the CFO's calculations are correct? * Since the proposed plan raises Galaxy's financial risk, the company's stock price can fall even if EPS rises. More bonds will be issued under the plan, increasing their liquidity and, as a result, lowering the interest rate on the bonds that are currently outstanding. Since the plan is expected to raise EPS, net income is also expected to grow. If the strategy succeeds in increasing EPS, the stock price would rise at the same rate. If the plan decreases the WACC, the stock price is likely to fall as well.arrow_forwardThe mutual funds Division has allocated $5.0M and is currently looking for investment opportunities to invest these funds, The financial analyst suggested that all new investments be made in the oil industry, steel industry or in government bonds. The analyst identified five investment opportunities:two from the oil industry, two from the steel and government bonds. Types of opportunities Returns ABC oil 0.095 XYZ oil 0.085 Mona Steel 0.04 TNT steel 0.05 Government Bonds 0.015 For the mutual Funds Division :a) Generate the objective function b) Generate the budget constraint c) The amount invested in oil should be at least three times the amount invested in the steel industry d) The investment in ABC oil cannot be more than 50 % of total oil industry e) The investment in TNT steel should be at most 40 % of the total investment in Government Bond f) The investment in XYZ oil should be at least 20 % of the total funds available but no more than 40%of total…arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
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