Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Question
Chapter 16, Problem 2MC
b)
1)
Summary Introduction
Case summary:
Company P is a regional pizza restaurant chain. The given details are as follows,
EBIT is $50 million,
Tax rate is 40%,
Risk-free
Market risk premium is 6%,
Outstanding shares 10 million.
As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.
To discuss: Business risk and factors influence firm’s business risk.
2)
Summary Introduction
To discuss: Operating leverage and factors influencing operating leverage and calculate the operating leverage when fixed costs are $200, sale price is $15, and variable cost is $10.
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Students have asked these similar questions
What is operating leverage, and how does itaffect a firm’s business risk? Show the operating break-even point if a company has fixedcosts of $200, a sales price of $15, and variablecosts of $10.
Consider a company that pays out all its earnings (i.e., the payout ratio = 1 or plowback/retention ratio=0). The required return for the firm is 13%.
Compute the intrinsic P/E if its ROE is 15%.
Compute the intrinsic P/E if its ROE is 20%.
Discuss why your answers to parts (a) and (b) differ or do not differ from one another.
Suppose that the company’s ROE is 13%. Compute its intrinsic P/E value.
Would the answer to part (d) change if the company retained half of its earnings instead of paying all of them out? Discuss why or why not.
Which one of the following will decrease the net working capital of a firm? Assume the current ratio is greater than 1.0. A. selling inventory at cost
B. collecting payment from a customer
C. paying a payment on a long-term debt
D. selling a fixed asset for book value
E. paying a supplier for the purchase of an inventory item
Chapter 16 Solutions
Intermediate Financial Management
Ch. 16 - Prob. 1QCh. 16 - Prob. 2QCh. 16 - Prob. 3QCh. 16 - One type of leverage affects both EBIT and EPS....Ch. 16 - Prob. 5QCh. 16 - Prob. 6QCh. 16 - Prob. 7QCh. 16 - Prob. 8QCh. 16 - Prob. 9QCh. 16 - Prob. 1P
Ch. 16 - Premium for Financial Risk
Ethier Enterprise has...Ch. 16 - Value of Equity after Recapitalization Nichols...Ch. 16 - Prob. 9PCh. 16 - Prob. 10PCh. 16 - Capital Structure Analysis Pettit Printing Company...Ch. 16 - Prob. 16PCh. 16 - Prob. 1MCCh. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - Prob. 6MCCh. 16 - What does the empirical evidence say about capital...
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