Equity financing with debt financing, Corporate Finance

Assignment Help:

Seattle Health Plans currently uses zero debt financing.  Its operating income (EBIT) $1 million, and it pays taxes at a 40 percent rate.  It has $5 million in assests and because it is all equity financed $5 million in equity.  Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8 percent. 

  1. What impact would the new capital structure have on the firm's net income, total dollar return to investors, and ROE?
  2. Redo the analysis, but now assume the debt financing would cost 15 percent?
  3. Return to the initial 8 percent interest rate.  Now, assume that EBIT could be as low as $500,000 (with a probability of 20 percent) or as high as $1.5 million (with a probability of 20 percent).  There remains a 60 percent chance that EBIT would be $1 million.  Redo the analysis for each level of EBIT, and find the expected values for the firm's net income, total dollar return to investors, and ROE.  What lessons about capital structure and risk does this illustration provide?
  4. Repeat the analysis required for Part a, but now assume the Seattle Health Plans is a not-for-profit corporation and hence pays no taxes.  Compare the results with those obtained in Part a.

 

 


Related Discussions:- Equity financing with debt financing

Priori forecasting, Chang and Fyffe (1971) assume that a ?rm has a ''long-r...

Chang and Fyffe (1971) assume that a ?rm has a ''long-run sales history of individual seasonal-style-goods SKUs or groups of such SKUs''. They propose to estimate demand by using r

Evaluate the capital structure, Question: (a) According to Modigliani a...

Question: (a) According to Modigliani and Miller's Theory of Capital Structure (1963), companies should make maximum use of gearing. Briefly, describe factors which might pr

Fin.., Online Tutoring Work with expert instantly or schedule a lesson wit...

Online Tutoring Work with expert instantly or schedule a lesson with your preferred topic at your convenient time. Get a real time experience from anywhere in virtual one-to-one o

Prepare a basic master budget, The first part requires you to prepare a bas...

The first part requires you to prepare a basic master budget. The general description is provided in Part A, in this document. However the data for the assignment is to be obtained

What are potential limitations, Problem: "It is simply not really the c...

Problem: "It is simply not really the company's choice who is and is not a stakeholder" (a) Evaluate the above statement in the context of Civil Society Organisations as st

Main types of estimating methodology, (a) Accurate estimation is crucial f...

(a) Accurate estimation is crucial for effective planning and control and is related with time, information, experience of estimator, techniques used and funding. Discuss the thre

Impact of cost structure, You are required to provide a report of approx 50...

You are required to provide a report of approx 500 words or less (excluding attachments and references), accompanied by relevant calculations, in MS Word, MS Excel and/or PDF forma

Evaluate the annualized forward premium, Question: (a) A bank quotes t...

Question: (a) A bank quotes the following prices for the US dollar: €0.7915 - €0.7918 A German company receives €10 million as payment for a generator supplied to an Americ

Have the large bank holding companies increased their market, Have the larg...

Have the large bank holding companies increased their market share at the expense of smaller institutions? A: No. A study conducted by the Federal Reserve Bank of New York re

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd