20.2 A company's present capital structure consists of 1,000,000 shares of equity stock. It requires*10 million of external financing for which it is considering three alternatives. Alternative Acalls for issuing 1,000,000 equity shares (* 10 par); alternative B calls for issuing 600,000 equityshares (10 par) and 400,000 preference shares (10 par) carrying 11 percent dividend; alterna-tive C calls for issuing 200,000 equity shares (10 par) and 8 million of debentures carrying 15percent interest. The company's tax rate is 50 percent.Required:(a) What is the EPS - PBIT equation for alternatives A, B, and C?(b) Rank the alternatives according to EPS over varying levels of PBIT.itu charos (10 par) sellin

Let's break down the calculation and explanation for each alternative:**Alternative A: Issuing…

Answered: 20.2 A company's present capital…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 17P

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A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Source of Capital Target Market ProportionsLong Term Debt 25%Preferred Stock 15%Common Stock 60%Total Firm Value 100% Debt: The firm can sell a 10-year, RM1,000 par value, 6% bond for RM945.Preferred Stock: The firm has determined it can issue preferred stock at RM70 per share par value. The stock will pay a RM8 annual dividend.Common Stock: A firm's common stock is currently selling for RM19 per share.The dividend expected to be paid at the end of the coming year is RM1.85. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was RM1.50. Additionally, the firm's marginal tax rate is 35%.Determine the weighted average cost of capital for the firm.
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5. Company cost of capital (S9.2) You are given the following information for Golden Fleece Financial: Long-term debt outstanding: $300,000 Current yield to maturity (rdebt): Number of shares of common stock: Price per share: Book value per share: Expected rate of return on stock (requity): Calculate Golden Fleece's company cost of capital. 8% 10,000 $50 $25 15%
suppose that the Matrix corporation has $120 million of assets, all financed with equity, and that the form has 6 million shares of stock outstanding valued at $40 per share, suppose that management has identified investment opportunities requiring $60 million of new funds and can raise the funds in one of the following three ways: Financing package 1: Issue $60 million equity (3,000,000) shares of stocks at $40 per share) • Financing package 2: Issue $30 million equity (1,500,000) shares of stocks at $40 per share), and borrow $30 million with an annual interest rate 8% • Financing package 3: Borrow $60 million with an interest of 8%. a. Complete the following table for each financing package after the financing capital structure is completed: - Debt Equity No. of Shares Debt-equity ratio Debt-to- Financing package Assets Asset ratio 23 b. Suppose the Matrix Corporation has $27 million of operating earings. Show that the firm's return on assets is 15% c. compute the earnings per share…
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11. The Keshari Engineering Ltd has the following capital structure, considered to be optimum, on 31 June 2013. 14% Debt 10% Preference Ordinary equity Total million) 93.75 31.25 375.00 500.00 The company has 15 million shares outstanding. The share is selling for 25 per share and the expected dividend per share is 1.50, which is expected to grow at 10 per cent. The company is contemplating to raise additional funds of 100 million to finance expansion. It can sell new preference shares at a price of 23, less flotation cost of 3 per share. It is expected that a dividend of 2 per share will be paid on preference. The new debt can be issued at 10 per cent rate of interest. The firm pays taxes at rate of 35 per cent and intends to maintain its capital structure. You are required (i) to calculate the after-tax cost (a) of new debt, (b) of new preference capital, and (c) of ordinary equity, assuming new equity comes only from retained earnings which is just sufficient for the purpose, (ii)…
Estimate the cost of capital for company A. The company has 4 million shares and 125 000 bonds outstanding at par value $1 000. In addition, it has $20 million in short-term debt from its bank. The target capital structure ratio is 55 percent equity, 40 percent long-term debt, and 5 percent short-term debt. The current capital structure has temporarily moved slightly away from the target ratio. The companyʼs shares currently trade at $50 with a beta of 1.03. The book value of the shares is $16. The annual coupon rate of the bonds is 9 percent, they trade at 108 percent of par, and they will mature in ten years. Interest on the short-term debt is 3.5 percent. The current yield on ten-year government bonds is 5.2 percent. The market risk premium is 5 percent. The corporate tax rate applicable is expected to be 35 percent. Based on these data, calculate the cost of capital for company A.
3. W&N (Pty) Ltd is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. Structure B Source of Capital Structure A Long-term debt R75,000 @ 16% coupon rate Preferred stock R10,000 with an 18% dividend R50,000 @ 15% coupon rate R15,000 with an 18% annual dividend Common stock 8,000 shares 10,000 shares a) Calculate two EBIT-EPS co-ordinates for each of the structures. Use EBIT of R40,000 and R60,000 (when making comparisons R30,000 and R50,000 apply to both structure A and B). Find their associated EPS values. /4/ /3/ b) Plot the two capital structures on a set of EBIT-EPS axes. (Please label your graph). /3/ c) Indicate over what EBIT range, if any, each structure is preferred. d) Discuss the leverage and risk aspects of each structure. /3/ e) Which structure would you recommend if the firm expects its EBIT to be R35,000. Explain. /3/ 4. Jane is 22 years old and is planning for her retirement at age 62 (ie first payment at 63).…
C. Levered plan Firm value? is…..
XYZ is comparing two different capital structures. Plan I would result in 13,000 shares of stock and $130,500 in debt. Plan II would result in 10,000 shares of stock $243,600 in debt. The interest rate on the debt is 10%. a). Ignoring taxes, compare plans I and II to an all equity plan assuming that EBIT will be $56,000. The all equity plan will result in 16,000 shares of stock OUTSTANDING. Which of the 3 plans has the highest EPS? And which has the lowest? b). In part A, what are the break-even levels of EBIT for plan I compared to an all equity plan? What about for plan II I compared to an all equity plan? Is one higher than the other? Why (explain). c). Ignoring taxes, when will EPS be identical for plans I and II?
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?
Subject: accounting

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