4. The financial manager for a new startup company is faced with a problem of how to finance this new firm. The firm needs $1,000,000 in funds to become operational. The question is whether $1,000,000 of new equity at $10 a share should be issued or a 60/40 debt/equity capital structure with 8% coupon on debt is better. Required: What is the Breakeven EBIT? Should the firm use only equity or a 60/40 mix of debt- equity in its capital structure?
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- Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return. Current Proposed Assets $10,000 $18,000 Debt $0 $8,000 Equity $10,000 $10,000 Debt/Equity ratio 0.00 .80 Interest rate n/a 7% Shares outstanding 500 500 Share price $20 $20 (e ) If the company stock price goes up by 2% from announcing it is adding debt to expand the business, what effect does this have on the WACC?FFC is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 4%; the market risk premium, RPM, is 5%; and the firm’s tax rate is 40%. Currently, FFC has beta of 1.5. What would be FFC’s estimated cost of equity if it changed its capital structure to 40% debt and 60% equity? Should the company opt new capital structure, decide based on the cost of equity computations?The FMS Corporation needs to raise investment money amounting to $40 million in new equity. The firm’s market risk is βM = 1.4, which means the firm is believed to be riskier than the market average. The risk free interest rate is 2.8% and the average market return is 9% per year. What is the cost of equity for the $40 million?
- DataCore INc. has an all-equity capital structure. However, the firm is considering a recapitalization that would structure the firm with 25% debt and 75% equiy by issuing an appropriate amount of debt and repurchasing an equal amount of common stock; the debt is expected to have a 5% coupon rate. The firm expects the following scenarios over the next year for EBIT: Outlook Probability EBIT Good 35% $800,000 Average 40% $525,000 Poor 25% $75,000 The firm currently has 200,000 shared of common stock outstanding at $43 per share. The firm is in a 0% tax bracket 1. Determine the expected earnings before interest and taxes, net income, and earnings per share (a) if the firm maintains its current unlevered capital structure and (b) if it recapitalizes at 25% debt and uses the procedes to repurchase common stock. 2. Following the assumptions behind M&M's Proposition I, calculate the…You are an analyst in the Finance department at a conglomerate, where the CFO believes the cost of equity is 10% and the WACC is 7.5%. A project has been proposed to create a new business line, and your manager asks you to calculate the NPV assuming the project is funded entirely by equity. Should you discount the CF’s using a) 10%, b) 7.5% or c) some other rate? Why?A company is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 6%; the market risk premium, RPM, is 6%; and the firm's tax rate is 40%. Currently, the company’s cost of equity is 14%, which is determined by the CAPM. What would be the companies estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? Round your answer to two decimal places. Do not round intermediate steps.
- A company currently has EBIT of $25,000 and is all-equity financed. The company expect EBIT to stay at this level indefinitely. Now assume the firm issues $50,000 of debt paying interest of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm? Make a case for why X is the best option and explain what considered, what assumptions you made and why?Kosm Limited has hired you on as a consultant to assist with their capital budgeting. Their target capital structure is 40% debt, 10% preferred stock, and 50% common equity. The interest rate on new debt is 6.25%, the yield on the preferred stock is 7.00%, the cost of retained earnings is 10.75%, and the tax rate is 21%. The company will not be issuing any new stock. What is their WACC?Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, Rf, is 5%; the market risk premium, RPM, is 6%; and the firm’s tax rate is 40%. Currently, Cyclone’s cost of equity is 14%, which is determined by the CAPM. What would be Cyclone’s estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? based on cost of equity estimations, Should the firm change its capital structure?
- An investor is considering starting a new business. The company would require $475,000 of assets, and itwould be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business? Please show work in excelYou are a venture capitalist and have been approached by Cirrus Electronics, aprivate firm. The firm has no debt outstanding and does not have earnings now but isexpected to be earning $15 million in four years, when you also expect it to go public.The average price-earnings ratio of other firms in this business is 50.a. Estimate the exit value of Cirrus Electronics.b. If your target rate of return is 35 percent, estimate the discounted terminal valueof Cirrus Electronics.c. If you are contributing $75 million of venture capital to Cirrus Electronics, at aminimum what percentage of the firm value would you demand in return?Blue Co. is trying to estimate its optimal capital structure. Currently, the firm has a capital structure that consists of 20% debt and 80% equity. The risk-free rate is 6% and the market risk premium is 5%. The company’s cost of equity is 12% under the capital asset pricing model approach and its corporate tax rate is 40%. What is the new levered beta if the capital structure will shift from its current structure to 50% debt and 50% equity? a. 1.67 b. 1.39 c. 1.49 d. 1.25