Capital Structure and Net Operating Income Study Guide

In order to find the WACC, we need to find the cost of the components of the capital structure and their proportion in the total capital.

c) Optimization of the capital structure is also consistent with the growth of the company. The optimal capital structure

Problem 15-10: Optimal Capital Structure with Hamada a. BEA’s unlevered beta is 0.870 bU =b/(1+ (1-T)(D/S)) =1.0/(1+(1-0.40)(20/80)) = 0.870 b. b = bU (1 + (1-T)(D/S)) At 40 percent debt: bL = 0.87 (1 + 0.6(40%/60%)) = 1.218 rS = 6 + 1.218(4) = 10.872% = wd rd(1-T) + wcers =

Debt to equity = Total debt ÷ GE shareowners’ equity = 11,589 ÷ 116,438 = 0.10 4. Does the company have any preferred stock? (shares/book value/market price and value) GE does not have any preferred stock outstanding that is available to the public. 5. What is the capital structure of the company?: Short term portion of Long Term Debt, Long Term Debt, Preferred Stock (if any), and market value of Common Stock issued and outstanding?

OPTIMAL CAPITAL STRUCTURE (OCS) Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the

10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.

0.94. Using the capital asset pricing model, the cost of equity comes to 9.65%. Rf Beta (Project) MRP Cost of Equity 3.10% 0.94 7% K (e) = K (rf) + beta (project) * MRP K(e) = 9.65% Capital Structure The firm has decided to increase the debt finance component portion from 20% to 30% which is a good decision since the interest payments are 100% tax deductible. The appropriate capital structure would be to

ETR = Income Tax Expense / Income before Tax ETR = $84,000 / $654,000 ETR = 0.1283 or 12.83% Moreover, let’s calculate the Weighted Average Cost of Capital (WACC). And in order to calculate it we need to know the capital structure of the company. Knowing the capital structure of the

Once the prevailing WACC rate was found, the target WACC was calculated to be 9.00%. Again the CAPM model was used but a new the required rate of return on equity needed to be calculated. Since there is a change in the capital structure an unlevered beta needed to be determined. The Hamada equation was used to unlever the beta, which had a debt to equity ratio of .70, then to re-lever it again with a debt to equity ratio of 1.5; this changed the beta from

We would recommend the capital structure with 30% debt. This is because with 30% debt, they would be able to repurchase 19.8 million shares outstanding as well as save 37.8 million in taxes. EBIT is high in this company, and because of this, financial leverage will raise EPS and ROE. However, variability also increases as financial leverage increases, so the company would not want to take on too much debt and become very risky.

A firm can choose a mix of three modes of financing i.e. issuing shares, borrowing from the market and use of retained earnings. The ratio of this mix of funds purely depends on the firm and known as optimal capital structure of the firm. This leads to the different capital structure theories. These theories explain their

With all the above aspects considered, Adecco arrived at a debt portion of WACC equal to .96% and an equity portion of 9.31% resulting in an overall WACC of 10.27%. This was calculated utilizing a beta of equity considering a beta of debt and assets of 0.2 and 0.48 respectively. Utilizing the free cash

WACC = (Weight of Equity * Equity Cost of Capital) + (Weight of Debt * Debt Cost of Capital)

INTRODUCTION The purpose of the report is to understand the capital structure of the chosen company on the basis of the financial statements of the company which includes the income statement, balance sheet and the cash flow statement of the company and do the capital analysis of the company as well to find out the advantages and disadvantages in working capital of the company and suggest company logical and useful ways for growing their economy.

Introduction SKYCITY Entertainment Group Limited (SKY) is a leading entertainment and gaming business which has been a successful brand and has an iconic performance status since when the company first listed in New Zealand NZX in 1996. The core business of SKY is operating monopoly casinos in New Zealand (Auckland, Hamilton