ct was not worth pursuing. Who do you think is right? In no more than 200 words, give reasons for your answer starting with the case of perfect capital markets and then referencing other po
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At the last board meeting of company X, a producer of IT equipment, management raised the issue of scaling up current production to meet increased demand. The management team gave a presentation of the project, which is thought to have an
Who do you think is right? In no more than 200 words, give reasons for your answer starting with the case of perfect capital markets and then referencing other potentially relevant
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- Last year Chantler Corp. had $200,000 of assets, $20,000 of net income, and a debt-to-total-assets ratio of 30%. Now suppose the new CFO convinces the president to increase the debt ratio to 45%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $550,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? Do not round your intermediate calculations. a. 10.13% b. 10.64% c. 10.23% d. 8.59% e. 9.92%Last year ABC Company had $200,000 of total assets, $25,746 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt-to-total assets ratio to 45%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE (that is, new ROE - old ROE)? Round your answer to two decimal places of percentage. (Hint: ROE = net income/common equity) Group of answer choices 4.39% 4.47% 4.42% 4.53% 4.50%
- The management of a conservative firm has adopted a policy of never letting debt exceed 40 percent of total financing. The firm will earn $10,000,000 but distribute 40 percent in dividends, so the firm will have $6,000,000 to add to retained earnings. Currently the price of the stock is $40; the company pays a $2 per share dividend, which is expected to grow annually at 10 percent. If the company sells new shares, the net to the company will be $38. Given this information, what is the cost of retained earnings? Round your answer to one decimal place. % cost of new common stock? Round your answer to one decimal place. % The rate of interest on the firm’s long-term debt is 10 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,300,000, the interest rate will rise to 11 percent. Given this information, what is the cost of debt? Round your answer to one decimal place. % cost of debt in excess of $2,300,000? Round your answer to one…Gnomes R Us is considering a new project. The company has a debt-equity ratio of .72. The company’s cost of equity is 14.7 percent, and the aftertax cost of debt is 8 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +2 percent. a. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What discount rate should the firm use for the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Banerjee Inc. wants to maintain a capital structure with 30 percent debt and 70 percent common equity. Its forecasted net income is $ 535,000, and its board of directors has decreed that no new stock to be issued during the coming year. If the firms follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining its capital structure ?
- Gnomes R Us is considering a new project. The company has a debt-equity ratio of .86. The company's cost of equity is 14.6 percent, and the aftertax cost of debt is 7.9 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +3 percent. a. What is the company's WACC? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What discount rate should the firm use for the project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. WACC b. Project discount rate %You have been hired by a new firm that is just being started. The CFO wants to finance with 60% debt, but the president thinks it would be better to hold the percentage of debt in the capital structure (wa) to only 10%. The company is small, so it is not subject to the interest deduction limitation. Other things held constant, and based on th data below, if the firm uses more debt, by how much would the ROE change, i.e., what is ROEHigher - ROELower? Do not round your intermediate calculations. Operating Data Other Data Capital $4,000 Higher wd 60% ROIC = EBIT(1 - T)/Capital 12.00% Higher interest rate 13% %3D Tax rate 25% Lower wd 10% Lower interest rate 9% a. 3.75% b. 2.22% C 2.80% d. 2.54% e. 1,87%Dubs & Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of 10%. The CEO is unhappy with the current return on equity, and he thinks it could be doubled. This could be accomplished by increasing the profit margin to 14% and increasing debt utilization. Total assets turnover will not change. What new debt ratio, along with the 14% profit margin, is required to double the return on equity?
- The management of a conservative firm has adopted a policy of never letting debt exceed 40 percent of total financing. The firm will earn $14,000,000 but distribute 40 percent in dividends, so the firm will have $8,400,000 to add to retained earnings. Currently the price of the stock is $50; the company pays a $5 per share dividend, which is expected to grow annually at 11 percent. If the company sells new shares, the net to the company will be $45. Given this information, what is the cost of retained earnings? Round your answer to one decimal place. % cost of new common stock? Round your answer to one decimal place. % The rate of interest on the firm’s long-term debt is 11 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,900,000, the interest rate will rise to 12 percent. Given this information, what is the cost of debt? Round your answer to one decimal place. % cost of debt in excess of $2,900,000? Round your answer to one…The management of a conservative firm has adopted a policy of never letting debt exceed 40 percent of total financing. The firm will earn $14,000,000 but distribute 40 percent in dividends, so the firm will have $8,400,000 to add to retained earnings. Currently the price of the stock is $50; the company pays a $5 per share dividend, which is expected to grow annually at 11 percent. If the company sells new shares, the net to the company will be $45. Given this information, what is the cost of retained earnings? Round your answer to one decimal place. % cost of new common stock? Round your answer to one decimal place. % The rate of interest on the firm’s long-term debt is 11 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,900,000, the interest rate will rise to 12 percent. Given this information, what is the cost of debt? Round your answer to one decimal place. % cost of debt in excess of $2,900,000? Round your answer to one…An industrial firm with assets of $100 million is exploring the benefit of leveraging the balance sheet given expectations of economic growth. Currently, the firm is earning a return on assets of 9.00%, a return on equity of 15.00%, retains a debt ratio of 40% (equity to assets of 60%). The board of directors has requested management consider changing the debt ratio to 60% (equity to assets of 40%). The new debt will cost 4.00% given a credit rating downgrade. The firm will apply the proceeds of new debt to repurchase stock at book value. The firm is taxed @ 20% but expects that rate to rise in the future. First, estimate how the change in capital structure will impact pro forma net income, return on assets, and return on equity. Second, briefly indicate the advantages and risks of relying on additional debt to leverage the balance sheet.
