Solve the problem. Show work and do not use AI A company currently has $270,000 of equity and is planning a $120,000 expansion. The company currently earns $81,000 in netincome, and the expansion will yield $55,000 in additional income before any interest expense.The company is considering three separate options: (1) do not expand, (2) expand and issue $120,000 in debt that requires paymentsof 15% annual interest, or (3) expand and raise $120,000 from equity financing. For each option compute (a) net income and (b) returnon equity (Net income + Equity).Note: Amounts to be subtracted should be indicated with a minus sign. Round "Return on equity" to 1 decimal place.Dan't Expand Debt Financing Equity FinancingIncome before interest expenseInterest expenseNet incomeEquityReturn on equity%%%

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter4: Financial Planning And Forecasting

Section: Chapter Questions

Problem 6P

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You own debt with face amount of $150 Million that you lent to a firm managed by its sole shareholder, whose firm is expected to generate next year either a cash flow of $200 Million with probability .6, or $100 Million with probability .4. This is a one-time, one year project and then the firm will be shut down. In addition there is a project P that will generate $40 Million in either state next year. This new project requires funding of $30 million which the firm does not have, and so say he would have to issue junior debt to obtain the capital to undertake the project. Assume that all cash flows are discounted at 0%. a. Do you expect the manager to undertake the new project P? Explain how he would acquire the capital – in other words, what is the face value for the new junior debt. (The existing debt has a pari passu covenant it turns out that disallows senior debt)? b. The manager asks you to forgive $40 million in debt down to a new face value of $110 million. Again…
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A start-up company Amazonian.com is considering expanding into new product markets. The expansion will require an initial investment of $160 million and is expected to generate perpetual EBIT of $40 million per year. After the initial investment, future capital expenditures are expected to equal depreciation, and no further additions to net working capital is anticipated. Amazonian.com’s existing capital structure is composed of equity with a market value of $500 million and debt with a market value of $300 million, and has 10 million shares outstanding. The unlevered cost of capital for Amazonian.com is 10%, and Amazonian.com’s debt is risk free with an interest of 4%. The expansion into the new product market will have the same business risk as Amazonian.com’s existing assets. The corporate tax rate is 35%, there are no personal taxes or costs of financial distress. a) Amazonian.com initially proposes to fund the expansion by issuing equity. If investors were not expecting this…
Atlas Corporation wants to determine the optimal level of current assets that should be kept in the next year. The company is currently undergoing expansion, after which sales are expected to increase approximately by PKR 1 million. The company wants to maintain a 40% equity ratio and its total fixed assets are of PKR 1 million. Atlas’s interest rate is currently 8% on both short-term and longer-term debt (which the firm uses in its permanent structure). The company must choose between three strategies and decide which one is better. (1) a lean and mean policy where current assets would be only 35% of projected sales, (2) a moderate policy where current assets would be 40% of sales, and (3) a lenient policy where current assets would be 50% of sales. Earnings before interest and taxes should be 10% of total sales, and the federal-plus-state tax rate is 35%. a. What is the expected return on equity under each current asset level? (show all your workings)
Atlas Corporation wants to determine the optimal level of current assets that should be kept in the next year. The company is currently undergoing expansion, after which sales are expected to increase approximately by PKR 1 million. The company wants to maintain a 40% equity ratio and its total fixed assets are of PKR 1 million. Atlas’s interest rate is currently 8% on both short-term and longer-term debt (which the firm uses in its permanent structure). The company must choose between three strategies and decide which one is better. (1) a lean and mean policy where current assets would be only 35% of projected sales, (2) a moderate policy where current assets would be 40% of sales, and (3) a lenient policy where current assets would be 50% of sales. Earnings before interest and taxes should be 10% of total sales, and the federal-plus-state tax rate is 35%. What is the expected return on equity under each current asset level? In this problem, we assume that expected sales are…
Atlas Corporation wants to determine the optimal level of current assets that should be kept in the next year. The company is currently undergoing expansion, after which sales are expected to increase approximately by PKR 1 million. The company wants to maintain a 40% equity ratio and its total fixed assets are of PKR 1 million. Atlas’s interest rate is currently 8% on both short-term and longer-term debt (which the firm uses in its permanent structure). The company must choose between three strategies and decide which one is better. (1) a lean and mean policy where current assets would be only 35% of projected sales, (2) a moderate policy where current assets would be 40% of sales, and (3) a lenient policy where current assets would be 50% of sales. Earnings before interest and taxes should be 10% of total sales, and the federal-plus-state tax rate is 35%. What is the expected return on equity under each current asset level? (Solved) In this problem, we assume that expected sales are…
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Rentz Corporation is investigating the optimallevel of current assets for the coming year. Management expects sales to increase toapproximately $2 million as a result of an asset expansion presently being undertaken.Fixed assets total $1 million, and the firm plans to maintain a 60% debt-to-assets ratio.Rentz’s interest rate is currently 8% on both short- and long-term debt (which the firmuses in its permanent structure). Three alternatives regarding the projected currentassets level are under consideration: (1) a restricted policy where current assets wouldbe only 45% of projected sales, (2) a moderate policy where current assets would be 50%of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earningsbefore interest and taxes should be 12% of total sales, and the federal-plus-state taxrate is 40%.a. What is the expected return on equity under each current assets level?b. In this problem, we assume that expected sales are independent of the current…
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