The development of the new issue junk bond market had important implications for capital structure choice. The existence of a viable junk bond market means that firms can comfortably maintain higher degrees of leverage than they could prior to the development of this market. Do you agree or disagree? Justify your answer.
An unlevered firm has a cost of capital of 14% and earnings before interest and taxes of $150,000. A levered firm with the same operations and assets has both a book value and a face value of debt of $700,000 with a 7% annual coupon. The applicable tax rate is 35%. What is the value of the levered firm? Choose one answer.
Why would any firm pay another firm so much money to not produce? What do you think can be the benefits or ramifications of doing so?
You are Doc Vinny, the current CEO of Vitruvian Health and the potential CEO of Vitruvian Physician Partners (VPP) and chairman of the board of Vitruvian, Inc. In preparation for a meeting with the current CEO of Vitruvian Physician Partners, you are gathering information about the products and services provided by each of the V
You are Doc Vinny, and although you have been hand-picked by Dr. Montenegro to be his successor, your nomination must be confirmed as the VPP president and chairman of the board of Vitruvian, Inc. The other senior leaders of the health plan (VHP) and of the physician group (VPP) must meet to decide to confirm or reject your nomi
Case 9-23, parts a-g: Mutual of Chicago Insurance Company. Stock Evaluation: Robert Balik and Carol Kiefer are senior vice presidents of the Mutual of Chicago Insurance Company. They are co-directors of the company's pension fund management division, with Balik having responsibility for fixed-income securities (primarily bon
Comments on this statement that "...in a fast-changing business environment, structure is becoming less important, while processes, rewards, and people are becoming more important....(and)....managers can influence performance and culture-but only by acting through the design policies that effect behavior..." Galbraith (2002),
Discuss the three major components of the capital structure of an enterprise.
The required return on debt (before taxes) is 7.5%, the required return on equity is 15%, and the cost of capital is 10%. If the marginal income tax rate is 40%, what are the proportions of debt and equity financing?
What components make up an organization's capital structure? How might an organization go about developing its optimal capital structure? In addition to quantitative variables, what other factors should an organization consider when it is making capital structure decisions?
You are CEO of a high-growth technology firm. You plan to raise $180 million to fund an expansion by issuing either new shares or new debt. With the expansion, you expect earnings next year of $24 million. The firm currently has 10 million shares outstanding, with a price of $90 per share. Assume perfect capital markets: A
Why might firms whose sales levels change drastically over time choose to use debt only sparingly in their capital structures? What condition would cause capital structure management to be a meaningless activity?
3. What is meant by "an optimal capital structure of the firm"? Be specific. Consider three companies: Intel, Alcoa, and McDonalds. Reflect on the nature of the business of these three companies. You are recommended to also get to the web site of one company in each of these categories. You might also check what the beta of
"Many companies use stock repurchases to increase earnings per share. For example, suppose that a company is in the following position: Net profit $10 million Number of shares before repurchase 1 million Earnings per share $10 Price-earnings ratio 20 Share price $200 The company now repurchases 200,000 shares at $200 a sh
Bixton Company's new chief financial officer is evaluating Bixton's capital structure. She is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. Her staff prepared the industry comparison shown here.
Bixton Company's new chief financial officer is evaluating Bixton's capital structure. She is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. Her staff prepared the industry comparison show
Calculation of Share Value Estimates Associated with Alternative capital Structures Capital Structure Expected Estimated Estimated Debt Ratio EPS Required Return Share Value 0% $1.75 11.40% 10 1.90 11.80% 20 2.25 12.50% 30 2.55 13.25% 40 3.18 18.00% 50 3.06 19.00% 60 3.10 25.00% Given th
If Congress increased the personal tax rate on dividends and capital gains but simultaneously reduced the rate on corporate income, what effect would this have on the average company's capital structure?
I have to answer the question below in 450 words. I have been reading the chapter and don't fully understand this question: Devise the optimal capital structure for Time Warner in light of current, business, economic, and industry trends. Please cite any sources used.
Medtrans is a profitable firm that is not paying a dividend on its common stock. James Weber, an analyst for A. G. Edwards, believes that Medtrans will begin paying a $1.00 per share dividend in two years and that the dividend will increase 6% annually thereafter. Bret Kimes, one of James' colleagues at the same firm, is less op
University Technologies, Inc., (UTI) has a current capital structure consisting of 10 million shares of common stock, $200 million of first-mortgage bonds with a coupon interest rate of 13 percent, and $40 million of preferred stock paying a 5 percent dividend. In order to expand into Asia, UTI will have to undertake an aggressi
Elephant books sells paperback books for $7 each. The variable cost per book is $5. at current annual Sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors royalties are reduced, the variable cost per book will drop by $1. Assume authors royalties are reduced and sales remain consta
Millman Electronics will produce 60,000 stereos next year. Varibable costs will equal 50% of sales, while fixed costs will total $120,000. At what price must each widget be sold for the company to achieve an EBIT of $95,000?
THE COMPANY USED IS TARGET Balance Sheet and Market Value of Your Company's Liabilities and Equity Refer to your company's most recent balance sheet. Review the 'liabilities and equity side' of the balance sheet. (a) Short term liabilities (or debt) and long term liabilities Find our from the balance sheet of the co
Olson Corporation's capital structure consists of 40,000 shares of common stock. At December 31, 2004, an analysis of the accounts and discussions with company officials revealed the following information: Sales $1,400,000 Purchase discou
Chapter 17: Problem Sets (pp. 500) Problem B1 (Choosing financial targets) Bixton Company's new chief financial officer is evaluating Bixton's capital structure. She is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax cred
A company is comparing two different capital structures: An all equity plan (PLAN 1) and a levered plan (PLAN 2). Under plan 1 the company would have 200,000 shares of stock outstanding. Under plan 2 there would be 90,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 8%
Stock beta for Beckman Engineering and Associates (BEA) is 1.2 and an expected return of 12.5%. BEA is an all-equity company. BEA's expected earnings per share this coming year $1.50, with forward P/E ratio of 14. Suppose BEA issues new risk-free debt with 5% yield and repurchases 40% of its stock. Assume perfect capital mar
Using homemade leverage, how much do you need to borrow in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5000 investment in With stock? According to MM Proposition 1, the stock price for With is closest to.
1) Consider two firms, With and Without, that have identical assets that generate identical cash flows. Without is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. With has 2 million shares outstanding and $12 million dollars in debt at an interest rate of 5%. Assume that MM's perfe
Evaluate the capital structure policies of The Clorox Company as of fiscal year-end 2007. Decide whether Clorox's use of debt financing is appropriate or whether, given the company's circumstances, it might prudently use more or less financial leverage. You will find information about Clorox, including its annual reports at
Stephens Security has two financing alternatives: (1) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20 year life. (2) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.2% annual coupon,