PART IV
1. Ogden Optical Company has estimated the following costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure:
Proportion of Debt (B/B+E) | Cost of Debt, ki | Cost of Equity, ke |
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 | - 4.0% 4.2 4.4 4.8 5.5 6.6 8.0 | 10.0% 10.1 10.3 10.8 11.4 12.5 ucla学费14.5 18.0 400怎么跑 |
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Determine the firm’s optimal structure.
2. Two firms, No Leverage, Inc. and High Leverage, Inc., have equal levels of operating risk and differ only in their capital structure. No Leverage is unlevered and High Leverage has $500,000 of perpetual debt in its capital structure. Assume that the perpetual annual income of both firms available for stockholders is paid out as dividends. Hence, the growth rate for both firms is zero. The income tax rate for both firms is 40 percent. Assume that there are no financial distress costs or agency costs. Given the following data:
南归
| No Leverage, Inc. | High Leverage, Inc. |
Equity in capital structure Cost of equity, ke Debt in capital structure Pretax cost of debt, kd Net operating income (EBIT) | $1,000,000 10% 将理- - $ 100,000 | $500,000 13% $500,000 7% $100,000 |
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a. Determine the market value of No Leverage, Inc.
b. Determine the market value of High Leverage, Inc.
c. Prent value of the tax shield to High Leverage, Inc.
3. McGee Corporation has fixed operating costs of $10 million and a variable cost ratio of 0.65. The firm has a $20 million, 10 percent bank loan and a $6 million, 12 percent bond issue outstanding. The firm has 1 million shares of $5 (dividend) preferred stock and 2 million shares of common stock ($1 par). McGee’s marginal tax rate is 40 percent. Sales are expected to be $80 million.
a. Compute McGee’s degree of operating leverage at an 80 million sales level.
b. Compute McGee’s degree of financial leverage at an 80 million sales level.
c. If sales decline to 70 million, forecast McGee’s earnings per share.
4. Connely, Inc. expects sales of silicon chips to be $30 million this year. Becau this is 回家的路作文
a very capital-intensive business, fixed operating costs are $10 million. The variable cost ratio is 40 percent. The firm’s debt obligations consist of a $2 million, 10 percent bank loan and a $10 million bond issue with a 12 percent coupon rate. The form has 100,000 shares of preferred stock outstanding that pays a $9.60 dividend. Connely has 1 million shares of common stock outstanding and its marginal tax rate is 40 percent.
a. Compute Connely’s degree of operating leverage.
b. Compute Connely’s degree of financial leverage.
c. Compute Connely’s degree of combined leverage.
d. Compute Connely’s EPS if sales decline by 5 percent.我在大学等你
5. Emco Products has a prent capital structure consisting only of common stock (10 million shares). The company is planning a major expansion, At this time, the company is undecided between the following two financing plans (assume a 40 percent marginal tax rate):
⏹ Plan 1: Equity financing. Under this plan, an additional 5 million shares of common stick will be sole at $10 each.
⏹ Plan 2: Debt financing. Under this plan, %50 million of 10 percent long-term debt will be sold.
One piece of information the company desires for its decision analysis is an EBIT-EPS analysis.
a. Calculate the EBIT-EPS indifference point.
b. Graphically determine the EBIT-EPS indifference point.
Hint: U EBIT=$10 million and $25 million.
c. What happens to the indifference point if the interest rate on debt increas and the common stock sales price remains constant?
d. What happens to the indifference point if the interest rate on debt remains constant an
d the common stock sales price increas?
6. Morton Industries is considering opening a new subsidiary in Boston, to be operated as a parate company. The company’s financial analysts expect the new facility’s average EBIT level to be $6 million per year. At this time, the company is considering the following two financing plans (u a 40 percent marginal tax rate in your analysis):
体会英文⏹ Plan 1: Equity financing, Under this plan, 2 million common shares will be sold at $10 each.
⏹ Plan 2: Debt-equity financing. Under this plan, $10 million of 12 percent long-term debt and 1 million common shares at $10 each will be sold.
a. Calculate the EBIT-EPS indifference point.
b. Calculate the expected EPS for both financing plans.
c. What factors should the company consider in deciding which financing plan to adopt?
