Asempa Private Company limited has made strides in business over the past 15 years. Management is deciding to penetrate other markets to increase the market share. However, the business requires more capital injection to enable it expand its business. The best option so far is for the company to go public, then only can the company issue financial instruments such as equity shares,

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...

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David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: d. Suppose that Firms U and L have the same input values as in Part c except for debt of 980,000. Also, both firms have total net operating capital of 2,000,000 and both firms are expected to grow at a constant rate of 7%. (Assume that the EBIT in part c is expected at t = 1.) Use the compressed adjusted present value (APV) model to estimate the value of U and L. Also estimate the levered cost of equity and the weighted average cost of capital.
The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?
David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: e. Suppose the expected free cash flow for Year 1 is 250,000 but it is expected to grow faster than 7% during the next 3 years: FCF2 = 290,000 and FCF3 = 320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is 128,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be 152,000, at Year 3 it will be 192,000 and it will grow at 7% thereafter. What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)? What is the current unlevered value of operations? What is the horizon value of the tax shield at Year 3? What is the current value of the tax shield? What is the current total value? The tax rate and unlevered cost of equity remain at 25% and 14%, respectively.
David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: Who were Modigliani and Miller (MM), and what assumptions are embedded in the MM and Miller models?
Asempa Private Company limited has made strides in business over the past 15 years. Management is deciding to penetrate other markets to increase the market share. However, the business requires more capital injection to enable it expand its business. The best option so far is for the company to go public, then only can the company issue financial instruments such as equity shares, preference shares, bonds and debentures etc. to raise additional capital. From the case above, examine the effect of the decision to go public On the financial position of the firm On ownership structure On management control
Asempa Private Company limited has made strides in business over the past 15 years. Management is deciding to penetrate other markets to increase the market share. However, the business requires more capital injection to enable it expand its business. The best option so far is for the company to go public, then only can the company issue financial instruments such as equity shares, preference shares, bonds and debentures etc. to raise additional capital. From the case above, examine the effects of issuing preference shares, bonds and debentures (debt instruments) on the profitability of the firm
Asempa Private Company limited has made strides in business over the past 15 years. Management is deciding to penetrate other markets to increase the market share. However, the business requires more capital injection to enable it expand its business. The best option so far is for the company to go public, then only can the company issue financial instruments such as equity shares, preference shares, bonds and debentures etc. to raise additional capital. From the case above, examine the effects of issuing preference shares, bonds and debentures (debt instruments) on management control?
Asempa Private Company limited has made strides in business over the past 15 years. Management is deciding to penetrate other markets to increase the market share. However, the business requires more capital injection to enable it expand its business. The best option so far is for the company to go public, then only can the company issue financial instruments such as equity shares, preference shares, bonds and debentures etc. to raise additional capital. From the case above, examine the effects of issuing preference shares, bonds and debentures (debt instruments) i. on the profitability of the firm ii. on ownership structure iii. on management control
Asempa Private Company limited has made strides in business over the past 15 years. Management is deciding to penetrate other markets to increase the market share. However, the business requires more capital injection to enable it expand its business. The best option so far is for the company to go public, then only can the company issue financial instruments such as equity shares, preference shares, bonds and debentures etc. to raise additional capital. From the case above, examine the effect of the decision to go public i. on the financial position of the firm, ii. on ownership structure iii. on management control
Asempa Private Company limited has made strides in business over the past 15 years. Management is deciding to penetrate other markets to increase the market share. However, the business requires more capital injection to enable it expand its business. The best option so far is for the company to go public, then only can the company issue financial instruments such as equity shares, preference shares, bonds and debentures etc. to raise additional capital.From the case above, examine the effect of issuing only equity shares on the financial position of the firm on ownership structure and on management control
Asempa Private Company limited has made strides in business over the past 15 years. Management is deciding to penetrate other markets to increase the market share. However, the business requires more capital injection to enable it expand its business. The best option so far is for the company to go public, then only can the company issue financial instruments such as equity shares, preference shares, bonds and debentures etc. to raise additional capital. From the case above, examine the effect of issuing only equity shares on the financial position of the firm?
Asempa Private Company limited has made strides in business over the past 15 years. Management is deciding to penetrate other markets to increase the market share. However, the business requires more capital injection to enable it expand its business. The best option so far is for the company to go public, then only can the company issue financial instruments such as equity shares, preference shares, bonds and debentures etc. to raise additional capital. From the case above, examine the effect of issuing only equity shares on the ownership structure?