Reference no: EM131223554
Nelson Corporation has made the following forecast of sales, with the associated probabilities of occurrence noted.
Sales
|
Probability
|
$200,000
|
.20
|
300,000
|
.60
|
400,000
|
.20
|
The company has fixed operating costs of $100,000 per year, and variable operating costs represent 40% of sales. The existing capital structure consists of 25,000 shares of common stock that have a $10 per share book value. No other capital items are outstanding. The marketplace has assigned the following required returns to risky earnings per share.
Coefficient of
|
Estimated required
|
variation of EPS
|
return, ks
|
0.43
|
15%
|
0.47
|
16
|
0.51
|
17
|
0.56
|
18
|
0.60
|
22
|
0.64
|
24
|
The company is contemplating shifting its capital structureby substituting debt in the capital structure for common stock. The three different debt ratios under consideration are shown in the following table, along with an estimate, for each ratio, of the corresponding required interest rate on alldebt.
Debt
|
Interest rate
|
ratio
|
on all debt
|
20%
|
10%
|
40
|
12
|
60
|
14
|
The tax rate is 40%. The market value of the equity for a leveraged firm can be found by using the simplified method (see Equation 12.12).
a. Calculate the expected earnings per share (EPS), the standard deviation of EPS, and the coefficient of variation of EPS for the three proposed capital structures.
b. Determine the optimal capital structure, assuming (1) maximization of earnings per share and (2) maximization of share value.
c. Construct a graph (similar to Figure 12.7) showing the relationships in part b.(Note:You will probably have to sketch the lines, because you have only three data points.)
Excess cash to get it through the three-month slow season
: Rock Designs, Inc. is a jewelry store located in Miramar Beach, Florida. After Valentine’s Day, the store often has excess cash to get it through the three-month slow season. The primary shareholder, Hardy Rock, wants to make this seasonal cash work ..
|
What are the strengths of these special populations
: Write a 2,100- to 2,450-word paper that compares the experiences of the two groups and discusses unique treatment issues that must be taken into consideration for each of these groups.
|
Transactions for hurricane company
: On Oct 1, 2018, Hurricane lends $9,000 to another company. The other company signs a note indicating principal and 12% interest will be paid to Hurricane on Sep 30, 2019. On Nov 1, 2018, Hurricane pays its landlord $4,500 representing rent for the mo..
|
Prepaid advertising is debited-deferred revenue is credited
: On Nov. 28, 2018, Shocker recieves a $4,500 payment from a customer for services to be rendered evenly over the next three months. Deferred Revenue is credited. On Dec. 1, 2018, the company pays a local radio station $2,700 for 30 radio ads that were..
|
Calculate the expected earnings per share
: Calculate the expected earnings per share (EPS), the standard deviation of EPS, and the coefficient of variation of EPS for the three proposed capital structures.
|
Bond premiums and discounts
: On January 1, 2016, when the market rate for bond interest was 14%, Lenoir Corporation issued bonds in the face amount of $500,000 with interest at 12% payable semiannually. The bonds mature on December 31, 2023, and were issued at a discount of $53,..
|
Type of compensation is subject to employer withholding
: What type of compensation is subject to employer withholding? When are employees required to report tips to their employer? Are tips subject to the same withholding requirements as regular salary?
|
How geoffrey b. small actively implements marketing concept
: Discuss how the Geoffrey B. Small Company can use social media to demonstrate their commitment to the marketing management philosophy they employ.
|
Why people may not want to buy health insurance
: What are some of the advantages and disadvantages of the current healthcare system in the United States?
|