EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 12, Problem 12P
Summary Introduction
To determine: The size and cost of each block of funds.
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Annamz Corp. is looking at two possible capital structures. Currently, the firm is an all-equity firm with $1.2 million dollars in assets and 200,000 shares outstanding. The market value of each stock is $6.00. The CEO of Annamz is thinking of leveraging the firm by selling $600,000 of debt financing. The cost of debt is 8% annually, and the current corporate tax rate for Annamz is 30%. What is the break-even EBIT for Annamz with these two possible capital structures?
The White Corporation makes small Bozo replicas for sale in the growing Austin market. The
firm's capital structure consists of 60 percent common equity, 10 percent preferred stock, and
30 percent long-term debt This capital structure is believed to be optimal. White is planning
to raise funds over the coming year to finance expansion plans. The firm expects to have $40
million of retained earnings available. The cost of retained earnings is 18 percent. Additional
common equity can be obtained by selling new common stock at a cost of 19.6 percent. The
firm can sell a maximum amount of $20 million of preferred stock at a cost of 15 percent.
First-mortgage bonds totaling $25 million can be sold at a pretax cost of 14 percent. Beyond
$25 million, the firm would have to sell debentures at a pretax cost of 15 percent. The firm's
marginal tax rate is 40 percent.
Identify the size of each block of funds and the cost of the funds in each block. Be sure to
identify the maximum amount of funds…
Tortuga, Inc. is looking to raise $4 million for new equipment to enhance the efficiency of its
operations. The firm currently is capitalized with 250,000 shares of equity at a market price
of $35 per share and also has $2,000,000 of debt with an interest rate of 9%. The company
believes that with the new capital they could achieve an EBIT of $1,500,000. Assume new
equity could be issued at current market price and that new debt would still carry a 9%
coupon. The company has a 25% marginal tax rate. Should Tortuga issue Equity or Debt?
Debt, because EPS will be $2.88
Debt, because EPS will be $1.95
O Equity, because EPS will be $2.72
Equity, because EPS will be $2.13
Chapter 12 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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