EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 14, Problem 24P
a.
Summary Introduction
To determine: The indifference point level of EBIT between debt financing and common stock option.
b.
Summary Introduction
To determine: The indifference point level of EBIT between preferred stock and common stock option.
c.
Summary Introduction
To determine: Indifference point between the preferred and debt stock options exists or not with reason
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Hardware Co. is estimating its optimal capital structure. Hardware Co. has a capital structure that consists of 80% equity and 20% debt and a corporate tax rate of 40%. Based on the short-term treasury bill rates the risk-free rate is 6% and the market return is 11%. Hardware Co. computed its cost of equity based on the CAPM – 12%. The company will shift its capital structure to 50% debt and 50% equity funded.What would be Hardware Co.’s estimated cost of equity if it will shift its capital structure to 50% debt and 50% equity funded?
Crown Data(CD) has a current capital structure that consists of $120 million in common equity (15 million shares) and $80 million in long-term debt with an average interest rate of 11%. CD is considering an expansion project that will cost $22 million. The project will be financed either by issuing long-term debt at a cost of 12.5%, or the sale of new common stock at $35 per share. The firm's marginal tax rate is 40%. What is the EBIT indifference point between the two financing options?
Olsen Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $2 million of retained earnings with a cost of rs = 13%. New common stock in an amount up to $7 million would have a cost of re = 14.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 10% and an additional $6 million of debt at rd = 13%. The CFO estimates that a proposed expansion would require an investment of $6.6 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.
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
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