Various capital structures Charter Enterprises currently has $1.4 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, and 90%. (Note: The amount of total assets would not change.) Is there a limit to the debt ratio's value? Calculate the capital structure below: (Round to the nearest dollar.) Debt Ratio Debt Equity 10% 24

Various capital structures Charter Enterprises currently has $1.4 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, and 90%. (Note: The amount of total assets would not change.) Is there a limit to the debt ratio's value? Calculate the capital structure below: (Round to the nearest dollar.) Debt Ratio Debt Equity 10% 24

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 4P

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Various capital structures Charter Enterprises currently has $1.7 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, and 90%. (Note: The amount of total assets would not change.) Is there a limit to the debt ratio's value? Calculate the capital structure below: (Round to the nearest dollar.) Equity Debt Ratio 10% $ Debt $ C
As a first step, we need to estimate what percentage of MMMs capital comes from debt, preferred stock, and common equity. This information can be found on the firms latest annual balance sheet. (As of year end 2014, MMM had no preferred stock.) Total debt includes all interest-bearing debt and is the sum of short-term debt and long-term debt. a. Recall that the weights used in the WACC are based on the companys target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM? b. Find MMMs market capitalization, which is the market value of its common equity. Using the sum of its short-term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firms debt and common equity weights to be used in the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation.
(Capital structure analysis) The liabilities and owners' equity for Campbell Industries is found here: LOADING... . a. What percentage of the firm's assets does the firm finance using debt (liabilities)? b. If Campbell were to purchase a new warehouse for $1.1 million and finance it entirely with long-term debt, what would be the firm's new debt ratio? Accounts payable $519,000 Notes payable $248,000 Current liabilities $767,000 Long-term debt $1,101,000 Common equity $4,647,000 Total liabilities and equity $6,515,000
Tropical Tours is considering an expansion of its operations, which will require the company to issue new debt and equity. Tropical’s investment banker provided the following information about the cost of issuing new debt: If Tropical’s capital structure consists of 60 percent debt, what WACC break points are associated with issuing new debt? Kindly answer with explanation.
Micolash Industries plans to reduce the use of debt financing and increase the use of equity financing (for example, move from a 70% Debt-to-Capital Ratio to 50%). Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate (say 40%) all remain constant. Which of the following would occur? Group of answer choices The company’s interest expense would remain constant. The company would have less common equity than before. The company’s taxable income (EBT) would fall. The company would have to pay more taxes. The company’s net income would decrease.
OOOO As a financial analyst for a firm looking to make an investment in its operations, you are tasked with determining how upcoming projects are financed. Because the board of directors decided years ago that it would not offer preferred stock, the firm is comprised of only debt and equity financing. Given the following analysis of optional capital Ostructures, which is the optimal capital structure? Proportion of Debt After-Tax Cost Cost of Weighted Financing of Debt Equity Cost 0% 5% 9% 9.00% 10% 5% 9% 8.60% 20% 5% 9% 8.20% 30% 5% 9% 7.80% 40% 5% 10% 8.00% 50% 6% 11% 8.50% 60% 7% 13% 9.40% 70% 10% 17% 12.10% 80% 12% 20% 13.60% 90% 15% 25% 16.00% 100% 18% 25% 18.00% • . O · O 0 a. 30 percent b. 40 percent O c. 100 percent O d. 0 percent Icon Kov
Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to- capital ratio is somewhere between 20 % and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Debt / Capital Ratio Projected EPS Projected Stock Price 20 % $ 3.15 $32.25 30 3.40 37.75 40 3.70 35.50 50 3.55 34.00 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure ? Choose from the options provided above. Round your answers to two decimal places. % debt % equity At what debt to capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to two decimal places. %
An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 9.00 percent, and the cost of common equity (in the form of retained earnings) is 17.00 percent. b. Recalculate the firm's weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Debt Common equity Weighted average cost of capital Weighted Cost % 0.00 %
Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Debt/Capital Ratio Projected EPS Projected Stock Price 20% $3.20 $33.00 30 3.50 36.00 40 3.90 37.50 50 3.60 32.50 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? Choose from the options provided above. Round your answers to two decimal places. % debt % equity At what debt-to-capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to two decimal places. %
(Related to Checkpoint 4.2) (Capital structure analysis) The liabilities and owners' equity for Campbell Industries is found here: a. What percentage of the firm's assets does the firm finance using debt (liabilities)? b. If Campbell were to purchase a new warehouse for $1.2 million and finance it entirely with long-term debt, what would be the firm's new debt ratio? a. What percentage of the firm's assets does the firm finance using debt (liabilities)? The fraction of the firm's assets that the firm finances using debt is 27.21 %. (Round to one decimal place.) Data table Accounts payable Notes payable Current liabilities Long-term debt Common equity $514,000 $255,000 $769,000 $1,294,000 $5,326,000 $7,389,000 Total liabilities and equity Click on the icon in order to copy its contents into a spreadsheet.) X
Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Projected EPS Projected Stock Price $3.10 $32.75 3.55 36.25 3.85 35.75 3.60 33.00 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? Choose from the options provided above. Round your answers to two decimal places. Debt/Capital Ratio 20% 30 40 50 % debt % equity At what debt-to-capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to % wo decimal places.
Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Projected EPS Projected Stock Price $32.25 $3.10 3.45 37.25 3.80 36.25 3.60 33.50 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? Choose from the options provided above. Round your answers to two decimal places. % debt % equity At what debt-to-capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to two decimal places. Debt/Capital Ratio 20% 30 40 50 %