Calculate the break points of total financing associated

Assignment Help Financial Management
Reference no: EM131878841

Bonanza Brothers Ltd manufactures leather saddles and has the following capital structure which it considers to be optimal under present and forecast conditions:

Proportion Used

Debt 40%

Equity 60%

Total debt and equity 100%

For the coming year, the financial manager Hoss Cartwright expects after-tax earnings of $2.4 million. Bonanza Brothers’ past dividend policy of paying out 60 per cent of earnings will continue. Present commitments from its banker will allow Bonanza Brothers to borrow further amounts of finance according to the following schedule:

Loan Amount and Interest Rate

$0 to $750,000 9%

$750,001 and above 11%

Bonanza Brothers’ taxation rate is 40 per cent. The current market price of its shares is $4.80. Its most recent dividend was $0.46 per share, and the expected growth rate in dividends is a constant 5 per cent per annum. External equity can be sold at a flotation cost of 10 per cent

of the amount raised.

Bonanza Brothers has the following capital investment opportunities for the next year:

Project Cost Internal Rate Return

A $900,000 16% p.a.

B $1,200,000 15%

C $500,000 14%

D $750,000 12%

E $1,000,000 11%

Required:

a. Calculate the break points of total financing associated with each source of capital for Bonanza Brothers.

b. Calculate the costs of equity and debt capital associated with their respective total financing break points.

c. Calculate the weighted average cost of capital (WACC) for each of the ranges of total new financing determined in part a.

d. Which capital projects should Bonanza Brothers accepts for the coming year? Why? Support your answer with the use of a WMCC schedule and IOS graph.

Reference no: EM131878841

Questions Cloud

The end of the project life might lead to multiple IRRs : Can you think of some other capital budgeting situations in which negative cash flows during or at the end of the project's life might lead to multiple IRRs?
Advantages and disadvantages of cloud computing : What are the information security implications of Cloud Computing, and how can a company mitigate against them?
Load passwords from a stored password file : We will extending the Caesar cypher we looked at earlier into a full-fledged password saver. The program will be able to: Load passwords from stored password
How do employees interact with each other : What does the working environment look like? (furnishings, artwork, lighting, sounds, etc.) How do employees interact with each other?
Calculate the break points of total financing associated : Calculate the break points of total financing associated with each source of capital for Bonanza Brothers.
What is total dollar amount of expenses associated : What is the total dollar amount of expenses (direct and indirect) associated with Tiger Brew's SEO?
What is the most that you would be willing to pay : What is the most that you would be willing to pay for a payment stream of $100 per year for the first fifteen years and $200 per year for the next five years.
What is the present value of the stream of cash flows : Consider an investment that pays $200 one year from now, with cash flows increasing by $200 per year through year 4.
Explain the purpose of an enterprise system : Discussion Questions- Explain the purpose of an enterprise system? Describe and discuss the three types of enterprise systems.

Reviews

Write a Review

Financial Management Questions & Answers

  Foreign company acquisition

Acquisition by a foreign company and the effects of that decision and the results of foreign exchange in Euro and the exchange rate differences.

  Financial management for profit and non profit organizations

In this essay, we are going to discuss the issues of financial management in a non-profit organisation.

  Method for estimating a venture''s value

Evaluate venture's present value, cash and surplus cash and basic venture capital.

  Replacement analysis

This document show the Replacement Analysis of modling machine. Is replacement give profit to company or not?

  Business finance task - capital budgeting

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique.

  Analysis of the investment

In this project, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice).

  Conduct a what-if analysis

Review the readings and media for this unit, including the Anthony's Orchard case study media. Familiarise yourself with the Anthony's Orchard company and its current situation.

  Determine operational expenditures

Organisations' behaviour is guided by financial data. In the short term, such data will help determine operational expenditures; in the long term, historical data may help generate forecasts aimed at determining strategic plans. In both instances.

  Personal financial management

How much will you have left over each half year if you adopt the latter course of action?

  Sources of finance for expansion into new foreign markets

A quoted company is considering several long-term sources of finance for expansion into new foreign markets.

  Long term financial planning

This assignment is designed for analyze Long term financial planning begins with the sales forecast and the key input in the long term fincial planning.

  Explain the role of fincial manager

This assignment explain the role of fincial manager, function of manger. And what are the motives of financial manager.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd