Question 1ABC Limited is an all-equity firm and has a present capital structure of 10 million shares ofcommon stock, which trades at $12 per share. The company is contemplating an expansionprogramme that requires a capital cost of $18 million. Two alternative financing plans areunder consideration:Plan 1-(Equity financing). Sale of 1.5 million additional shares of common stock.Plan 2 (Debt financing). Issue $18.0 million in 12% Long-term debt.The firm's marginal rate of tax is 35 percent.You are required to:a. Determine the break-even EBIT, given the two financing plans.b. Suppose ABC Limited's EBIT is likely to be $24 million. Which alternative financingplan would you recommend, assuming you want to maximize EPS?

Equity Financing Debt Financing No. of Shares Outstanding Original 1,00,00,000.00…

Answered: ABC Limited is an all-equity firm and…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 14P

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ABC Limited is an all-equity firm and has a present capital structure of 10 million shares ofcommon stock, which trades at $12 per share. The company is contemplating an expansionprogramme that requires a capital cost of $18 million. Two alternative financing plans areunder consideration:Plan 1-(Equity financing). Sale of 1.5 million additional shares of common stock.Plan 2 (Debt financing). Issue $18.0 million in 12% Long-term debt.The firm’s marginal rate of tax is 35 percent.You are required to:a. Determine the break-even EBIT, given the two financing plans. b. Suppose ABC Limited’s EBIT is likely to be $24 million. Which alternative financingplan would you recommend, assuming you want to maximize EPS?
ABC Investments Inc. is currently managing a capital structure that includes a $3.5 million debt with an interest rate of 12.3%. The company is planning a $5 million expansion initiative and is evaluating five financing alternatives: Plan 1 2 3 4 Debt 0% 35% 50% 50% Preferred 0% 0% 0% 20% Equity 100% 65% 50% 30% 20% 5 60% 20% The preferred stock carries a 12% dividend rate, and the common stock is priced at $18 per share. Currently, the company has 750,000 shares of common stock outstanding and operates in a 40% tax bracket. a. If the earnings before interest and taxes are $1.5 million, what would be earning per share for five alternatives, assuming no immediate increase in the operating profit. b. Compute the degree of financial leverage (DFL) for each alternatives at the expected EBIT level of $1.5 million. c. Which alternative do you prefer and why?
A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Source of Capital Target Market ProportionsLong Term Debt 25%Preferred Stock 15%Common Stock 60%Total Firm Value 100% Debt: The firm can sell a 10-year, RM1,000 par value, 6% bond for RM945.Preferred Stock: The firm has determined it can issue preferred stock at RM70 per share par value. The stock will pay a RM8 annual dividend.Common Stock: A firm's common stock is currently selling for RM19 per share.The dividend expected to be paid at the end of the coming year is RM1.85. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was RM1.50. Additionally, the firm's marginal tax rate is 35%.Determine the weighted average cost of capital for the firm.
Question1: Cybernauts, Ltd., is a new firm that wishes to finance an expansion program and determine its capital structure. It can issue 20 percent debt or 18 percent preferred stock. The total capitalization of the firm will be $6 million, and common stock can be sold at $25 per share. The company is expected to have a 50 percent tax rate. Four possible capital structures being considered are as follows: Plan Debt Preferred Common 1 20% 20% 60% 2 35 25 40 3 50 0 50 4 40 25 25 What would be the earnings per share for the four alternatives if earnings before interest and taxes are at $1.5 million?
ABC Inc. has a the capital structure shown below. Liabilities Stockholders' Equity $122,099,000 $95,228,000 ABC Inc. will raise additional capital for new projects this year, in the amount of $44,978,000. The firm believes, however, that a capital structure with 56.25% debt is ideal. The firm will be able to issue new discount bonds at a price of $909 with a yield-to-maturity of 3%. Assuming they want to change their capital structure to the new target, how many new bonds will the firm need to issue? unur answer to the nearest bond.
The Albany Company has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8% coupon rate). The company is planning a major expansion and is undecided between two financing plans.Plan A: Equity financing. Under this plan, an additional 2.5 million shares of common stock will be sold at $15 per share.Plan B: Debt financing. Under this plan, $37.5 million of 10% long-term debt will be sold.At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 40% marginal tax rate.
IRIS Corp. has determined its optimal capital structure as follows: (ATTACHED) Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of the par value would be required in addition to the discount of $50. Preferred Stock: The firm has determined it can issue preferred stock at $45 per share par value. The stock will pay an $6.5 annual dividend. The cost of issuing and selling the stock is $2.5 per share. Common Stock: The firm's common stock is currently selling for $25 per share. The dividend expected to be paid at the end of the coming year is $3.75. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.45. It is expected that to sell, a new common stock issue must be underpriced at $2 per share and the firm must pay $0.75 per share in flotation costs. Additionally, the firm's marginal tax rate is 20 percent. Calculate the firm's weighted average cost of capital…
Value-Add Enterprises Ltd. has a capital structure comprising exclusively of equity shares amounting to Rs. 10, 00,000. To fund its expansion plans, he company now wishes to raise an additional Rs. 5,00,000. It is considering among the following three alternatives: (i) Raise the entire expansion money as equity share capital itself (ii) Raise 50% as Equity Share Capital and balance as 10% Debentures (iii) Keep Equity constant and raise 60% as 10% Debentures and balance as 12% Preference Share Capital. The market price per share is 100 and it is assumed it will remain same under all the financing plans. The firm therefore wishes to use EPS as the basis to select the right financial plan. Given a tax rate of 40%, which plan would you recommend to the firm?
TRM Consulting Services currently has the following capital structure: Source Book Value Quantity Common Stock $ 25,000,000 1,250,000 Preferred Stock 5,000,000 100,000 8,600 Debt 8,600,000 New debt would mature on June 30, 2051, have a coupon rate of 7%, and would be sold for their par value of $1,000. The bonds pay interest semiannually, and flotation costs would be 2% of the selling price. The bonds would be issued on June 30, 2021. The preferred stock pays a $6 dividend each year and is currently valued at $75 per share. Flotation costs on preferred would be 4% of the price. The common stock, which can be bought for $35, has experienced a 6% annual growth rate in dividends and is expected to pay a $1.65 dividend next year. Flota- tion costs on new common cquity would be 8%. The stock has a beta of 1.25, the risk-free rate is 3%, and the expected market risk premium is 6%. In addition, the firm expects to generate $150,000 of retained earnings. Assume that TRM's marginal tax rate is…
Lamina Equipments Company's current capital structure consists of 8% debt with a market value and book value of P4M and 200,000 shares of outstanding common stock with a market value of P15M. The firm is considering a P6M expansion program using 1 of the following financing plans: Plan A- sell additional debt at 10% interest; Plan B- sell preferred shares with a 10.5% dividend yield; Plan C- sell new ordinary shares at 150 per share. The corporate tax rate is 25%. Ignore flotation costs. 1. If the expected level of EBIT after the expansion is P2.5M, the EPS for Plan A is2. If the expected level of EBIT after the expansion is P2.5M, the EPS for Plan B is3. If the expected level of EBIT after the expansion is P2.5M, the EPS for Plan C is4. The indifference level of EBIT between Plan A & C is5. The indifference level of EBIT between Plan B & C is6. Calculate the financial break-even point at Plan B.
Xavier Manufacturing Company has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Target Market - Source of Capital Proportions Long-term debt 35% Preferred stock 5% Common stock equity 60% Debt: The firm plans to issue a 20-year, $1,000 par value, 6%(percent) bond. A flotation cost of 3% (percent) of the face value would be required. Preferred Stock: The firm has determined it can issue preferred stock at $70 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the preferred stock will be $3 per share. Common Stock: The firm’s common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.00. Its dividend payments have been growing at a constant rate for the last five years at a rate of 5%. In order to assure that the new stock issuance will sell,…
ADI Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has 2 million dollars in 6% bond. The company is considering 3 million dollars expansion programthat can be financed with: 1) All common stock @ $ 60 per share 2) Bonds at 8% interest Requirements: a) For an expected EBIT level of $1 million after the expansion program, calculate earnings per share for each alternative methods of financing. Assume a tax rate of 50% b) Calculate the indifference points between alternatives. c) Calculate the financial breakeven point of each alternative. d) If expected EBIT for the near future is greater than your answer in part (b) what form of financing would you recommend.

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