EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 14, Problem 10P
a.
Summary Introduction
To compute: Annual interest charges in case of no
b.
Summary Introduction
To Compute: New annual interest charges.
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An unlevered firm perceives its optimal dividend policy to be a 40 percent payout ratio. Asset turnover is sales/assets = 80%, the profit margin is 10 percent, and the firm has a target growth rate of 5%.
a. Is the firm's target growth rate consistent with it other goals?
b. If not, how much does it need to increase asset turnover to achieve it goals?
c. How much would it need to increase the profit margin instead?
What is operating leverage, and how does itaffect a firm’s business risk? Show the operating break-even point if a company has fixedcosts of $200, a sales price of $15, and variablecosts of $10.
1) A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5.
If the cost of debt, rD, is 6%, what will be rS after the recapitalization?
2) A firm with wD = 0.35 and wS = 0.65 plans to issue another $100 million of permanent debt. The firm's tax rate is 21%. The bonds will be issued at par with coupon rate = rD = 7%/year. The firm's WACC is 11%/year.
By how much will the new debt change the value of the firm, and who will receive this value?
A) Firm value will increase by $21 million, and all $21 million will go to the shareholders
B) Firm value will increase by $9 million, and 35% will go to the bondholders, 65% to the shareholders
C) Firm value will increase by $18.6 million, and 35% will go to the bondholders, 65% to the stockholders
D) Firm value will increase by $21 million, and all $21 million will go to the…
Chapter 14 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 14.A - Prob. 1QTDCh. 14.A - Prob. 2QTDCh. 14.A - Prob. 3QTDCh. 14.A - Prob. 2PCh. 14.A - Prob. 3PCh. 14.A - Prob. 4PCh. 14.A - Prob. 5PCh. 14.A - Prob. 6PCh. 14.A - Prob. 7PCh. 14.A - Prob. 8P
Ch. 14 - Prob. 1QTDCh. 14 - Prob. 2QTDCh. 14 - Prob. 3QTDCh. 14 - Prob. 4QTDCh. 14 - Prob. 5QTDCh. 14 - Prob. 6QTDCh. 14 - Prob. 7QTDCh. 14 - Prob. 8QTDCh. 14 - Prob. 9QTDCh. 14 - Prob. 10QTDCh. 14 - Prob. 11QTDCh. 14 - Prob. 1PCh. 14 - Prob. 2PCh. 14 - Prob. 3PCh. 14 - Prob. 4PCh. 14 - Prob. 5PCh. 14 - Prob. 6PCh. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Prob. 9PCh. 14 - Prob. 10PCh. 14 - Prob. 11PCh. 14 - Prob. 12PCh. 14 - Prob. 13PCh. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Prob. 16PCh. 14 - Prob. 17PCh. 14 - Prob. 18PCh. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Prob. 21PCh. 14 - Prob. 22PCh. 14 - Prob. 23PCh. 14 - Prob. 24PCh. 14 - Prob. 25PCh. 14 - Prob. 26PCh. 14 - Prob. 27PCh. 14 - Prob. 28PCh. 14 - Prob. 29PCh. 14 - Prob. 30PCh. 14 - Prob. 31PCh. 14 - Prob. 32PCh. 14 - Prob. 33PCh. 14 - Prob. 34P
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- A company had WACC (weighted average cost of capital) equal to 8. % If the company pays off mortgage bonds with an interest rate of 4% and issues an equal amount of new stock considered to be relatively risky by the market, which of the following is true? a. residual income will increase. b. ROI will decrease. c. WACC will increase. d. WACC will decrease.arrow_forwardMilton Industries expects free cash flows of $19 million each year. Milton's corporate tax rate is 22 %, and its unlevered cost of capital is 13%. Milton also has outstanding debt of $73.37 million, and expects to maintain this level of debt permanently. a. What is the value of Miton Industries without leverage? b. What is the value of Milton Industries with leverage? Cam a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is 5 million (Round to two decimal places.) b. What is the value of Milton Industries with leverage? The value of Milton Industries with leverage is $million. (Round to two decimal places)arrow_forwardSuppose the profitable company, Hermes, Inc., previously calculated its external financing needs (EFN) to be $18,200,000. What will happen to the EFN if management now decides to decrease the dividend payout ratio from 35.00% to 25.00%? (1) It will increase to some value greater than $18,200,000. (2) It will fall to some value lower than $18,200,000. (3) It will remain at $18,200,000. (4) The answer depends on Hermes, Inc.’s growth rate in sales. (5) The answer depends on Hermes, Inc.’s profit margin.arrow_forward
- A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization?arrow_forwardRequired: 1. How many units would the company need to sell to earn a profit before taxes of $10,000? 2. If the company achieves its projections, what will be its degree of operating leverage?arrow_forwardA. CALCULATE the cost of equity capital of H Ltd., whose risk-free rate of return equals 10%. The firm's beta equals 1.75 and the return on the market portfolio equals to 15%. B. The current ratio of H Ltd is 5:1 and standard current ratio given by accounting bodies is 2:1? Do you think that H Ltd should try to reduce its current ratio?arrow_forward
- Give typing answer with explanation and conclusion A company has an expected EBIT of $18,000 in perpetuity, a tax rate of 35%, and a debt-to- equity ratio of 0.75. The interest rate on the debt is 9.5%. The firm’s WACC is 9%. a) If the company has not debt, what would be the unlevered cost of capital and firm value? b) Suppose now the company has $55,714.29 in outstanding debt. Using your answer to part a) and M&M Proposition I with taxes, what is the value of this levered firm?arrow_forwardConsider a company that pays out all its earnings (i.e., the payout ratio = 1 or plowback/retention ratio=0). The required return for the firm is 13%. Compute the intrinsic P/E if its ROE is 15%. Compute the intrinsic P/E if its ROE is 20%. Discuss why your answers to parts (a) and (b) differ or do not differ from one another. Suppose that the company’s ROE is 13%. Compute its intrinsic P/E value. Would the answer to part (d) change if the company retained half of its earnings instead of paying all of them out? Discuss why or why not.arrow_forwardA firm has an asset turnover ratio of 5.0. Its plowback ratio is 50%, and it is all-equity-financed. If the profit margin of the firm is 3%, what is the maximum payout ratio that will allow it to grow at 5% without resorting to external financing? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Maximum payout ratio %arrow_forward
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