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- You are investigating the expansion of your business and have sought out two avenues for the sourcing of funds for the expansion. The first (Plan A) is an all-ordinary-share capital structure. $1 million would be raised by selling 250,000 shares at $4 each. Plan B would involve the use of financial leverage. $700,000 would be raised issuing bonds with an effective interest rate of 13% (per annum). Under this second plan, the remaining $300,000 would be raised by selling 75,000 shares at $4 price per share. The use of financial leverage is considered to be a permanent part of the firm's capitalisation, so no fixed maturity date is needed for the analysis. A 30% tax rate is appropriate for the analysis. REQUIRED: a) Find the EBIT indifference level associated with the two financing plans using an EBIT-EPS graph. Check your results algebraically. b) A detailed financial analysis of the firm's prospects suggests that the long-term earnings before interest and taxes (EBIT) will be $110,000…(i) A target firm has the following characteristics: An estimated enterprise value of $100 million Long-term debt whose market value is $10 million $8 million in excess cash balances Estimated PV of currently unused licenses of $15 million Estimated PV of future litigation costs of $3 million 2 million common shares outstanding What is the value of the target firm’s equity per common share? Answer :Question1: Cybernauts, Ltd., is a new firm that wishes to finance an expansion program and determine its capital structure. It can issue 20 percent debt or 18 percent preferred stock. The total capitalization of the firm will be $6 million, and common stock can be sold at $25 per share. The company is expected to have a 50 percent tax rate. Four possible capital structures being considered are as follows: Plan Debt Preferred Common 1 20% 20% 60% 2 35 25 40 3 50 0 50 4 40 25 25 What would be the earnings per share for the four alternatives if earnings before interest and taxes are at $1.5 million?
- Question 79 ) Frankline Coin, Inc. is considering two capital structures. The key information follows. Assume a 40 percent tax rate and expected EBIT of $50,000. Source of Capital Long-Term debt Common Stock Structure 1 $500,000 @ 8% 10,000 shares Structure 2 $350,000 @ 7% 20,000 shares (a) Calculate two EBIT-EPS Coordinates for each of the structures. (b) Indicate over what EBIT range, if any, each structure is preferred.You are considering a stock investment in one of two firms (NoEquity, Inc., and NoDebt, Inc), both of which operate in the same industry and have identical operating income of $25,5 million. NoEquity, Inc., finances its $50 million in assets with $49 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc. finances its $50 million in assets with no debt and $50 million in equity Both firms pay a tax rate of 30 percent on their taxable income Calculate the net income and return on assets for the two firms. (Enter your dollar answers in millions of dollars. Round all answers to 2 decimal places.) NoEquity m NoDebt $0 Net income Return on assetsHewlard Pocket's market value balance sheet is given. Assets Liabilities and Shareholders' Equity A. Original balance sheet Cash Debt 150,000 950,000 Equity $1,100,000 Other assets 1,100,000 Value of firm Value of firm $1,100,000 Shares outstanding = 100,000 Price per share = $1,100,000 / 100,000 = $1 Pocket needs to hold on to $52,000 of cash for a future investment. Nevertheless, it decides to pay a cash dividend of $2.10 per share and to replace cash as needed with a new issue of shares. After the dividend is paid and the new stock is issued: a. What will be the price per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will be the total value of the company? (Enter your answers in whole dollars, not in millions.) c. What will be the total value of the stock held by new investors? (Enter your answers in whole dollars, not in millions. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) d. What…
- Blazingame Inc.'s capital components have the following market values. Debt$34,030,000Preferred Stock16,500,000Common equity47,860,000 Calculate the firm's capital structure and show the weights that would be used for a weighted average cost of capital (WACC) computation. Round the values to the nearest dollar and the weights to three decimal places of percentage. Debt$ fill in the blank 1 Values Weights Debt $ _____ Preferred Stock ____ _____ Common Equity ____ _____ $ _____ _____K 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 Long-term debt Common stock Structure A $99,000 at 15.6% coupon rate 5,000 shares Structure B $198,000 at 16.6% coupon rate 2,500 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 $78,000, which structure would you recommend? Why?A financial analyst is in the process of estimating the cost of capital of Gewicht GmbH. The following informnation is obtained from the company web pages. Market value of debt: $50 million • Market value of equity: $600 million Table 1. Primary competitors and capital structures (in millions) Market value of Market value of Competitor debt equity A $25 $50 B $101 $190 C $40 $60 QUESTIONS: What are Gewicht GmbH target capital structure (DV and E/V) if the analyst uses current capital structure? und numberto four decimalpla to report the results Options: 0.4213 0.4921 0,4545 0,5454 D/V v EN
- (b) The Chief financial officer of Kurdishy Oil has given you the assignment of estimating thefirm’s cost of capital. The present capital structure, which is considered optimal, is as follows:Market ValueDebt $40 millionPreferred stock 5 millionCommon equity 55 millionThe anticipated financing opportunities are:1) Debt can be issued with a 15 percent before-tax cost.2) Preferred stock will be $100 par, carry a dividend of 13 percent, and can be sold at $96per share.3) Common equity has a beta of 1.20, rM = 17% and rf = 12%.Kurdishy’s tax rate is 40%.(i) Calculate the after-tax cost of debt, cost of preferred stock and cost of equity of GalaxyOil. (ii) What is the cost of capital of Kurdishy Oil? (iii) The CEO of Kurdishy asks you about the company’s capital structure. She wants toknow why the company doesn't use more preferred stock financing as it costs less thandebt. What would you tell the president? [Note: Confine your answer to no more acouple of lines.]Begin with the partial model in the file Ch02 P21 Build a Model.xlsx on the textbooks Web site. a. Using the financial statements shown here for Lan Chen Technologies, calculate net operating working capital, total net operating capital, net operating profit after taxes, free cash flow, and return on invested capital for 2020. The federal-plus-state tax rate is 25%. b. Assume there were 15 million shares outstanding at the end of 2019, the year-end closing stock price was 65 per share, and the after-tax cost of capital was 10%. Calculate EVA and MVA for 2020. Lan Chen Technologies: Income Statements for Year Ending December 31 (Millions of Dollars) Lan Chen Technologies: December 31 Balance Sheets (Thousands of Dollars)2. A company has share capital of Kshs 20 million and is planning to invest an additional fund of Kshs 16,000,000 towards its expansion programme. Suggest the best option from the following, from a tax point of view: 1. To issue share capital of Kshs 16,000,000. 2. To borrow Kshs 4,000,000 @ 18% pa and to issue debentures of Kshs 4,000,000 @ 11% pa and the balance amount be collected by issuing shares in the public. 3. To issue debentures for Kshs 10,000,000 @ 11% pa and the balance be collected by issuing shares in the public. 4. Rate of return is 30% before paying any interest and tax. Rate of tax is 30%