Find the break points associated with each source

Assignment Help Cost Accounting

Reference no: EM13183179

Part A:

The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure.

Explain and discuss their theorem along with a critique of the advantages and disadvantages of the theorem

Part B

Beyond Ltd management believes its optimal capital structure weights are as follows:

35% Long term Debt
15% Preference Shares
50% ordinary Share Capital

The firm is in the 40% tax bracket.

The firm's Investment Opportunities Schedule

Project	IRR	Initial Investment
A	14%	$300,000
B	25%	$400,000
C	17%	$600,000
D	14%	$500,000
E	19%	$300,000
F	16%	$800,000
G	15%	$400,000

Financing cost data is as follows:

Long-term debt:

The firm can raise $550 000 of additional debt by selling 15-year, $1000 par value, 9% coupon interest rate bonds that pay annual interest. It expects to net $960 per bond after flotation costs. Any debt in excess of $550 000 will have a before-tax cost, kd, of 13%.

Preference share capital:

Preference shares, regardless of the amount sold, can be issued with a $80 par value, 14% annual dividend rate and will net $75 per share after flotation costs.

Ordinary share equity:

The firm expects dividends and earnings per share to be $0.96 and $3.20, respectively, in 2008, and to continue to grow at a constant rate of 11.5% per year. The firm's shares currently sell for $14 per share. Beyond expects to have $1.75 million of retained earnings available in the coming year. Once the retained earnings have been exhausted, the firm can raise additional funds by selling new ordinary shares, netting $10 per share after underpricing and flotation costs.

Calculate the cost of each source of financing, as specified:

a. Long-term debt, first $550 000.

b. Long-term debt, greater than $550 000

c. Preference shares, all amounts

d. Ordinary share capital, first $1.75 million

e. Ordinary share capital, greater than $1.75 million.

f. Find the break points associated with each source of capital and use them to specify each of the ranges of total new financing over which the firm's WACC remains constant.

g. Calculate the WACC over each of the ranges of total new financing specified in f.

h. Using your findings in g along with the IOS, draw the firm's weighted marginal cost of capital (WMCC) and IOS on the same set of axes (total new financing or investment on the x-axis and WACC and IRR on the y-axis).

i. Which, if any, of the available investments would you recommend that the firm accept? Explain your answer.

Reference no: EM13183179

Questions Cloud

Contract to develop child care software for NCC : Your company has been awarded a contract to develop Child Care Software for Neñios Day Care Center (NCC). The software should maintain a database of Family, Child, and Payroll information. Users of the software shall have the ability to add/update/de..

What happens to the natural rate of unemployment : If the economy currently has a frictional unemployment rate of 2 percent, structural unemployment of 2 percent, seasonal unemployment of 0.5 percent, and cyclical unemployment of 2 percent, what is the natural rate of unemployment? Where is the ec..

Compare the use of open market operations : Compare the use of open market operations, loans to financial institutions, and changes in reserve requirements to control the money supply on the basis of the following criteria: flexibility, reversibility, effectiveness, and speed of implementat..

Find the break points associated with each source : Find the break points associated with each source of capital and use them to specify each of the ranges of total new financing over which the firm's WACC remains constant.

Elements of european imperialism-bad to absolutely evil : There's little question that many of the elements of European imperialism over the centuries have ranged from bad to absolutely evil, but have there been at least some good elements as well?

Explain the use of a limited pricing strategy : The New York Times reports that Wal-Mart has decided to challenge Netflix and enter the online DVD by mail market. Because of economies of scale, Wal-Mart has a slight cost advantage relative to Netflix. Wal-Mart is considering the use of a limite..

NATO expansion assignment : Which nations have been most impacted by the 2008 NATO expansion and why? Using this group of nations, provide a detailed assessment of the concerns and end-goals that affect the various governments' pronouncements and actions. What prompts a diverge..

Find out by atomic absorption spectrometry : The amount of lead in a aqueous sample is determined by atomic absorption spectrometry. Two standard solutions are prepared and used to make a calibration curve, and then the absorbance of the sample is measured.

User Account

All Pages