Explore BrainMass
Share

Corporate Debt Expansion

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

1. Corporate debt has been expanding very dramatically since World War II. What has been the impact on interest coverage, particularly since 1977?
2. What are some specific features of bond agreements?
3. What is the difference between a bond agreement and a bond indenture?

1. Why has corporate management become increasingly sensitive to the desires of large institutional investors?
2. Why might a corporation use a special category such as founders' stock in issuing common stock?
3. What is the purpose of cumulative voting? Are there any disadvantages to management?

© BrainMass Inc. brainmass.com October 24, 2018, 10:52 pm ad1c9bdddf
https://brainmass.com/business/interest-rates/corporate-debt-expansion-173571

Solution Preview

1. Corporate debt has been expanding very dramatically since World War II. What has been the impact on interest coverage, particularly since 1977?

Since 1977, major changes in corporate financing occurred including the phenomenal growth in the use of junk bonds, the onslaught of debt-financed hostile takeovers and leveraged buyouts. Many commentators warned that these debt-bloated companies and an economic downturn could turn the nineties into the decade of bankruptcy. As we know interest coverage reflects the ability of the company to pay its interest and calculated as annual operating earnings (income before interest and taxes) divided by annual interest expense. A firm's capital structure can affect the value of the firm only if investors are willing to pay more or less for the leveraged highly indebted firm. In the leveraged firm, the debt holders must receive their interest payments before the shareholders receive the remaining profits. Today most investors prefer firms which stay out of financial distress so that losses are not easily incurred. As the ...

Solution Summary

The author discusses their Solution in 695 words.

$2.19
See Also This Related BrainMass Solution

Corporate Finance: Data Case

Data Case

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 markets:

a. What is the beta of BEA stock after the stock repurchase?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

b. What is the expected return of BEA stock after stock repurchase?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

c. What is the expected earnings per share of BEA stock after stock repurchase?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

d. What is the forward P/E ratio of BEA stock after this transaction?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

Suppose BEA plan to raise $60 million to fund an expansion by issuing new shares. With the expansion, BEA expects earnings next year of $8 million. BEA currently has 3 million shares outstanding, with a price of $30 per share.

e. If BEA raises the $60 million by selling new shares, what will the forecast for next year's earnings per share be?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

f. What will the BEA's forward P/E ratio be if it issues new equity?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

Suppose BEA rejects the initial plan of repurchasing 40% of its stock by issuing new risk-free debt with 5% yield. BEA is now contemplating to raise $60 million to fund expansion by issuing new debt.

g. If BEA raises the $60 million by issuing new debt with an interest rate of 5%, what will the forecast for next year's earnings per share be?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

h. What will the BEA's forward P/E ratio be if it issues debt?

Ans.: Enter your response here. [Must show accurate formula(s) and computations for full credit.]

i. According to your analysis what is the best course of action for BEA? Explain in detail.

Ans.: Enter your response here.

Must show all necessary data points, equations and computations accurately to earn maximum point.

View Full Posting Details