Essay about Financial Ratios

effective cost of { [ (1 + .15/365)^365 ] - 1 } * 100 = 16.18% per year.

The 8 percent pre-tax estimate is the nominal cost of debt. Because the firm's debt has semiannual coupons, its effective annual cost rate is 8.16 percent

- The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.30 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 93 percent of its face value. What is the company's pre-tax cost of debt?

The tax rate is estimated from case Exhibit 2 as Income Taxes ($496 million) divided by Earnings Before Taxes, Non-controlling Interest and Goodwill Amortization ($990 million). Note that, in 2001, interest on the company’s total debt is approximately 3.8%: $317 million of interest / $8,361 million of debt. However, this calculation is misleading since the 2000 debt is much larger than the 1999 debt of $2,270 (not in the case). You should ask yourself…should you use current yields or historical yields when calculating the cost of debt? Current yield figures should be used because Telus is considering

Calculate the after tax cost of debt using the following information (hint: see page 285 in text).

Thus the WAVG Cost of Debt (including L/T debt and preferred stock) = rd = 8.633%

California Best Trucks maintains a debt ratio of 60%. Due it’s bond rating, the company pays an interest of 6.5% on it’s debt. When we multiply the tax rate (adjusted by subtracting one from the marginal rate) by the debt ratio of 60% and then multiply by our interest rate of 6.5%, our

Cost of Debt has been calculated by dividing Interest Expense for the Year 1997 with the average balance of Long Term Debt + Current Maturity of Long Term Debt during

(Assume that the amount of debt issued to reach the target debt-to-capital ratio is going to be maintained forever. Use the tax rates assumed in the attached Excel file).

Gazal, a similar firm, follows the same strategic approach as Billabong taking the advantage of being a levered firm and perceived to having a target ratio. Gazal’s differs to Billabong in the approach of taking higher debt-to-equity ratio. Country Road, another comparable firm, takes on a different capital structure to the others as it recently became an unlevered firm.

13. Luteran Motors is an all equity firm with perpetual cashflows of $10 million forever. There are 10 million shares outstanding. The cost of capital for the unlevered firm is 10%. Firm plans to build a new plant that will cost $ 4 million. The plant is expected to generate additional cashflow of $1 million forever. The firm will issue $4 million of either equity or debt. Show the effects of different financing methods on value of firm, cost of equity and price per share. There are no taxes in the economy. 14. Water Corporate has a tax rate of 40% and expects EBIT of $ 1 Million. Its entire earnings after taxes are paid out as dividends. The firm is considering two alternative capital structures. Under Plan I, Water Products has no debt in its capital structure. Under Plan II, the company would have $ 4,000,000 of Debt, B. The cost of debt is 10%. What is the amount of Tax savings under plan II? 15. Dividend Airline is currently an all equity firm. Its management is considering changing its capital structure. The company has perpetual earnings $ 166.67 before interest and taxes (EBIT). It faces corporate tax rate of 40% and thus has after tax cashflow of $100. Its cost of debt capital is 10%. Unlevered firms in the same industry have cost of equity of 20%. The management wants to issue 200 of debt and use the

— Earnings per Share = Net Income – Preferred Dividends / Average Common Shares Outstanding

In this part Modigliani & Miller stated that the firm’s value is not affected by the structure of the capital between Equity and Debt, They proved this by having an example of two firms that has got the same conditions in everything, same cash flow, same operational risks and same opportunity costs. One of the firm’s capital structure is all equity and the other firm’s capital structure is a mixture between equity and debt, since the form of financing (debt or equity) can neither change the firm’s net operating income nor its operating risk, the values of levered and unlevered firms will be the same.

In the future, SELF will be able to set limits on their cost of debt, by using some of the available alternatives (see next chapter). Furthermore, we know that the limits on the debt ratio are 4 to 1, in comparison with the net worth of SELF. Interpreting this, we assume that SELF may have a maximum of 80% debt, with 20% equity in their capital structure (4 to 1). The current Prime-rate is 8,75% and will be used as a basis to calculate the possible WACC for SELF. Assuming that the debt rates are before tax, we will subtract a tax rate of 30% on the debt rates, resulting in:

The board objective of the study is to examine the impact of capital structure on firm performance of some selected manufacturing companies in United Kingdom. Other specific objectives are to: