Reference no: EM13483476

Problem: 1

WACC Calculations

Willerton Industries Inc. has the following  balances in its capital accounts as of 12/31/X3:

Long-term debt	$65,000,000
Preferred stock	$15,000,000
Common Stock	$40,000,000
Paid in excess	$15,000,000
Retained earnings	$37,500,000

Calculate Willerton's capital structure based on book values.

Problem:2

Market Value- Based Capital Structure

A relatively young firm has capital components valued at book and market and market component costs as follows. No new securities have been issued since the firm originally capitalized.

	Value
Component	Market	Book	Cost
debt	$428,320	$40,000	8.50%
preferred stock	$10,650	$10,000	10.60%
common equity	$65,740	$32,000	25.30%

a. Calculate the firm's capital structures and WACCs based on both book and market values, and compare the two.

b. What appears to have happened to interest rates since the company was started?

c.  Does the firm seem to be successful? Why?

d. What would be the implication of using a WACC based  on book as opposed to market values? In other words,  what kind of mistakes might management make by using the book values?

Problem:3

Managing EPS Through Leverage

The Tanenbaum Tea Company wants to show the stock market an EPS of $3 per share  but doesn't expect to be able to improve profitability over what is reflected in the financial plan for next year. The plan is partially reproduced below.

	Tanenbaum Tea Company Financial Projection 20X1 ($000)
EBIT	$18,750	debt	$13,000
Interest (@12%)	$1,560	equity	$97,000
EBT	$17,190	capital	$110,000
Tax (@40%)	$6,876
EAT	$10,314	Number of Shares =	3700000

Tanenbaums stock sells at book value. Will trading equity for debt help the firm achieve its EPS goal, and if so, what debt level will produce the desired EPS?

Problem:4

Forecasting Results through the DFL

Balfour Corp. has the following operating results and capital structure ($000).

Revenue	6000	Debt	$         1,200.00
Cost/expense	4500	Equity	$         8,800.00
EBIT	1500	Total	$      10,000.00

The firm is contemplating a capital restructuring to 60% debt. Its stock is currently selling for book value at $25 per share. The interest rate is 9% and combined state and federal taxes are 42%.

a. Calculate EPS under the current and proposed capital structures.

b. Calculate the DFL under both structures

c. Use the DFLs to forecast the resulting EPS under each structure if operating profits falls off by 5%, 10%, or 25%.