Trying to determine its optimal capital structure

Reference no: EM131116631

OPTIMAL CAPITAL STRUCTURE Carlisle Industries is trying to determine its optimal capital structure, which now consists of only common equity. The firm will add debt to its capital structure if it minimizes its WACC, but the firm has no plans to use preferred stock in its capital structure. In addition, the firm's size will remain the same, so funds obtained from debt issued will be used to repurchase stock. The percentage of shares repurchased will be equal to the percentage of debt added to the firm's capital structure. (In other words, if the firm's debt-to-capital ratio increases from 0 to 25%, then 25% of the shares outstanding will be repurchased.) Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firm's debt cost at different debt levels:

The firm has total capital of $5 million and 200,000 shares of common stock outstanding. Its EBIT is $500,000 and will not change if debt, at any of the levels shown in the table above, is added to the firm's capital structure. Carlisle uses the CAPM to estimate its cost of common equity, rs. It estimates that the risk-free rate is 3 5%, the market risk

premium is 4 5%, and its tax rate is 35%. Carlisle's current beta, which is bU because it has no debt, is 1 25.

a. Calculate the firm's interest expense, net income, shares outstanding, and EPS for each of the capital structures shown in the table above.

b. At what capital structure is EPS maximized, and what is the firm's EPS at this capital structure?

c. Calculate the after-tax cost of debt cost of equity (rs), and WACC for each of the capital structures shown in the table above.

d. Considering only the capital structures shown, at what capital structure is WACC minimized and what is the WACC at this capital structure?

e. At what capital structure does the firm maximize shareholder value? Is this the same capital structure selected in Parts b and d? Explain why it is, or why it isn't the same.

f. As an analyst, what is your recommendation to the firm's management regarding Carlisle's capital structure?

Reference no: EM131116631

Questions Cloud

Calculate the difference in length taking error limit : the length of 2 cylinder are measured to be l1=5.62+_0.01cm and l2=4.34+_0.02cm calculate the difference in length taking error limit into consideration

Transformed supply chain management : The collaboration and sharing of data has transformed supply chain management. The process has expanded from just being an internal function to multi-organizational. Do you see any downside to P&G sharing all their demand data with Wal-Mart?

What problem area would the internet intervention address : How would the effectiveness of the proposed intervention be tested? What are any legal and ethical issues related to the proposed intervention? Include the specific APA ethical standard(s) in your response.

Problem regarding the foreign exchange risk : What is forward exchange rate and what role do they play in insuring against foreign exchange risk?

Trying to determine its optimal capital structure : OPTIMAL CAPITAL STRUCTURE Carlisle Industries is trying to determine its optimal capital structure, which now consists of only common equity.

Prepare the journal entries necessary to record issue : Prepare the journal entries necessary to record issue of the new bonds and the refunding of the bonds. (Round answers to 0 decimal places, e.g. 38,548.

Company with retail outlets in the south-east : (a) RTY plc is a UK retail company with retail outlets in the south-east and north-west of England. In total the company has six retail outlets in the south-east and eight in the north-west.

Summarizes the meeting and offers : You have been asked to write a research report that summarizes the meeting and offers some recommendations that might be helpful to those managers who are struggling. Specifically, your report must include:

Describe what was the hypothesis or hypotheses being studied : Identify and describe what research method(s) was used - observations in a lab, natural observations, surveys, case study, correlational study, experiment etc.?

User Account

All Pages