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Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company's EBIT was $120 million last year and is not expected to grow. PizzaPalace is in the 25% state-plus-federal tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6 percent. The firm is currently financed with all equity, and it has 10 million shares outstanding.
When you took your corporate finance course, your instructor stated that most firms' owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. If the company were to recapitalize, then debt would be issued, and the funds received would be used to repurchase stock.
As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures:
Percent Financed
with Debt, wd rd
0% -
20 8.0%
30 8.5
40 10.0
50 12.0
Problem 1: Using the Information above, what recommendation of the financial decisions should be proposed for this company based on an analysis of its capital structure and capital budgeting techniques. Why is this recommendation best?
Meadowlands Design products head covers for golf clubs. The company expects to generate a profit next year. It anticipates fixed manufacturing costs of $200,500 and fixed general and administrative expenses of $80,000 for the year. Variable Manufactu..
Compare the monthly payments and total loan costs for the following pairs of loan options. Assume that both loans are fixed rate and have the same closing costs
Basic Motor Corporation uses target costing. Assume that Basic marketing personnel estimate that the competitive selling price for the QuikCar in the upcoming model year will need to be $23,300. Assume further that the QuikCar's total unit cost for t..
Which alternative would you recommend that the company accept? Show all computations using the net present value approach. Show separate computations for each project.
The net present value of a project is normally distributed with an expected value of $1,258,900 and a standard deviation of $960,850. Determine the probability that the project will have a net present value of less than zero.
What is the maximum amount of dividends per share the firm could pay? Determine the maximum amount of cash dividends it can pay this year
Mr. Silber received SF163 as a cash dividend immediately before the shares were sold. Compute the rate of return on this investment in terms of U.S. dollars.
A stock is expected to pay a dividend of $3.50 at the end of year, If it's required return is 18%. What is the stock's expected price 4 years from today
Sarfaraz Ahmed is negotiating sports employment contract. As his financial adviser, which contract would you recommend that he accept?
Calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine.
Since he will be on vacation during Canada Day, will the company still have to pay general holiday pay to Tommy, or will Canada Day be
Show Journal entries for admission of Smart.- Opening statement of financial position of new business.- Journal entries for writing off the goodwill which the new partners decided to do soon after the start of the new business.
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