I need a little bit of assistance with the attached questions. I have been able to answers others, but need help with these.
A single amount cash flow refers to an individual, stand alone, value occurring at one point in time. An annuity consists of an unbroken series of cash flows of equal dollar amount occurring over more than one period. It is basically a stream of equal annual cash flows, either inflows or outflows. There are two basic types of annuities:
1) Ordinary Annuity where the cash flow occurs at the end of each period, and
2) Annual Due Annuity where the cash flow occurs at the beginning of each period.
A mixed stream is a pattern of cash flows over more than one time period and the amount of cash associated with each period will vary. Basically, a mixed stream of cash flows display no particular pattern.
4-3 How is the compounding process related to the payment of interest on savings? What is the general equation for future value?
12-4 What is financial leverage? What causes it? How is the degree of financial leverage (DFL) measured?
P12-19 EBIT-EPS and capital structure Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate.
Source of capital Structure A Structure B
Long-term debt $100,000 at 16% coupon rate $200,000 at 17% coupon rate
Common stock 4,000 shares 2,000 shares
a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.
b. Plot the two capital structures on a set of EBIT-EPS axes.
c. Indicate over what EBIT range, if any, each structure is preferred.
d. Discuss the leverage and risk aspects of each structure.
e. If the firm is fairly certain that its EBIT will exceed $75,000, which structure would you recommend? Why?
P12-21 Integrative - Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $10,000,000, EBIT of $2,000,000, and preferred dividends of $200,000 and is taxed at a rate of 40%. In an effort to determine the optimal
capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment:
Capital structure Cost of debt, kd No. of common return, ks
debt ratio stock shares Required
0% 0% 200,000 12%
15 8 170,000 13
30 9 140,000 14
45 12 110,000 16
60 15 80,000 20
a. Calculate earnings per share for each level of indebtedness.
b. Use Equation 12.12 and the earnings per share calculated in part a to calculate a price per share for each level of indebtedness.
c. Choose the optimal capital structure. Justify your choice.
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