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ABC is trying to determine its optimal capital structure. The Company’s capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: D/V Rating Cost of Debt 0.1 AA 7.00% 0.2 A 7.2 0.3 A 8 0.4 BB 8.8 0.5 B 9.6 The company’s tax rate is 40 percent. The company uses the CAPM model to estimate its cost of equity. The risk-free rate is estimated to be 5 percent and the equity market risk premium is 6 percent. Company’s estimate of its asset beta is 1.05 Company’s operating profit (EBIT) is expected to be $2,000,000 in the foreseeable future. Assume no net investment in fixed assets (only depreciated assets are replenished) and working capital. ABC currently has 1,000,000 outstanding shares. 1) On the basis of this information, what are the unlevered company’s market value and its share price? 2) Assume that company is planning to recapitalize to reach an optimal capital structure. Assuming that company will use the new debt to repurchase its shares, for each D/V level determine a) Market Value of Firm b) Cost of equity c) Share Price after the recapitalization announcement d) Number of shares outstanding following the stock repurchase e) Market Value of Equity f) WACC and Optimal Capital Structure g) At what level of debt, company’s WACC is minimized? Explain. 3) Reflect on what you have learned about firm’s choice of capital structure in the light of the question above. What other considerations are given in determining capital structure in practice that is not captured in the context of the current question?
How much should a new graduate pay in 10 equal annual payments, starting 2 years from now, in order to repay $30000 load he has received today? The interest rate is 6% per year. This is from Engineering Economic Analysis 12th edition, problem 6-16. A..
O’Connell & Co. expects its EBIT to be $105,000 every year forever. The firm can borrow at 7 percent. O’Connell currently has no debt, and its cost of equity is 11 percent. If the tax rate is 35 percent, what is the value of the firm? What will the v..
Listen or review the slides on Health Insurance Exchanges.
In an effort to speed up the collection of receivables, Hill Publishing Company is considering increasing the size of its cash discount by changing its credit terms from "1/ 10, net 30" to "2/ 10, net 30" Currently, the company’s collection period av..
Waller Co. (WAG) paid a $0.157 dividend per share in 2006, which grew to $0.346 in 2012. This growth is expected to continue. What is the value of this stock at the beginning of 2013 when the required return is 15.7 percent?
Oklahoma Instruments has a bond issue outstanding that pays $70 annually. It has a face value of $1,000, and it will mature in eight years. Similar bonds are priced to yield 6.5%. What would you expect this bond to sell for? If you held this bond unt..
The cost of retained earnings is less than the cost of new outside equity capital. Consequently, it is totally irrational for a firm to sell a new issue of stock and to pay cash dividends during the same year. Discuss the meaning of those statements.
Eggspressions is experiencing rapid growth. The company just paid a dividend of $1.94 and expects dividends to grow at 16% per year for the next 11 years before leveling off at a 4% growth rate into perpetuity. If your minimum required return on the ..
We have a common stock which has a dividend which grows at 100%for the first 1 year and 200% for the next 1 year. After that it rises more reasonably, but we only know it indirectly. Net profit margin, ATO and financial leverage are .02, 3 and 2 resp..
You are valuing a technology company whose enterprise value is $800 million. The company has no debt, but considerable employee options, 10 million in total. Based on option pricing models, you value each option at $6.67 per option. what is the compa..
Familiarise yourself with the Anthonys Orchard company and its current situation; this can be done by exploring each of the tabs across the top of the screen in the Anthony's Orchard case study media.
Discuss how the different types of non-financial, ethical and environmental issues might influence the objective of maximizing shareholders’ wealth by companies?
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