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Who do you think is right? In no more than 200 words, give reasons for your answer starting with the case of perfect capital markets and then referencing other potentially relevant
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- The management of a conservative firm has adopted a policy of never letting debt exceed 40 percent of total financing. The firm will earn $10,000,000 but distribute 40 percent in dividends, so the firm will have $6,000,000 to add to retained earnings. Currently the price of the stock is $40; the company pays a $2 per share dividend, which is expected to grow annually at 10 percent. If the company sells new shares, the net to the company will be $38. Given this information, what is the cost of retained earnings? Round your answer to one decimal place. % cost of new common stock? Round your answer to one decimal place. % The rate of interest on the firm’s long-term debt is 10 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,300,000, the interest rate will rise to 11 percent. Given this information, what is the cost of debt? Round your answer to one decimal place. % cost of debt in excess of $2,300,000? Round your answer to one…The management of a conservative firm has adopted a policy of never letting debt exceed 40 percent of total financing. The firm will earn $14,000,000 but distribute 40 percent in dividends, so the firm will have $8,400,000 to add to retained earnings. Currently the price of the stock is $50; the company pays a $5 per share dividend, which is expected to grow annually at 11 percent. If the company sells new shares, the net to the company will be $45. Given this information, what is the cost of retained earnings? Round your answer to one decimal place. % cost of new common stock? Round your answer to one decimal place. % The rate of interest on the firm’s long-term debt is 11 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,900,000, the interest rate will rise to 12 percent. Given this information, what is the cost of debt? Round your answer to one decimal place. % cost of debt in excess of $2,900,000? Round your answer to one…The management of a conservative firm has adopted a policy of never letting debt exceed 40 percent of total financing. The firm will earn $14,000,000 but distribute 40 percent in dividends, so the firm will have $8,400,000 to add to retained earnings. Currently the price of the stock is $50; the company pays a $5 per share dividend, which is expected to grow annually at 11 percent. If the company sells new shares, the net to the company will be $45. Given this information, what is the cost of retained earnings? Round your answer to one decimal place. % cost of new common stock? Round your answer to one decimal place. % The rate of interest on the firm’s long-term debt is 11 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,900,000, the interest rate will rise to 12 percent. Given this information, what is the cost of debt? Round your answer to one decimal place. % cost of debt in excess of $2,900,000? Round your answer to one…
- Last year Jandik Corp. had $295,000 of assets (which is equal to its total invested capital), $18,750 of net income, and a debt-to-total-capital ratio of 37%. Now suppose the new CFO convinces the president to increase the debt-to-total-capital ratio to 48%. Sales, total assets, and total invested capital will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE? Do not round your intermediate calculations.Demo Inc. currently is financed with 10% debt and 90% equity. However, its CFO has proposed that the firm issue new long-term debt and repurchase some of the firm’s common stock. Its advisers believe that the long-term debt would require a before-tax yield of 10%, while the firm’s basic earning power is 14%. The firm’s operating income and total assets will not be affected. The CFO has told the rest of the management team that he believes this move will increase the firm’s stock price. If Demo Inc. proceeds with the recapitalization, which of the following items are also likely to increase? Check all that apply. Net income Basic earning power (BEP) Cost of equity (rsrs) Cost of debt (rdrd) Return on assets (ROA)Banerjee Inc. wants to maintain a capital structure with 30 percent debt and 70 percent common equity. Its forecasted net income is $ 535,000, and its board of directors has decreed that no new stock to be issued during the coming year. If the firms follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining its capital structure ?
- The management of a conservative firm has adopted a policy of neverletting debt exceed 30 percent of total financing. The firm will earn$10,000,000 but distribute 40 percent in dividends, so the firm will have$6,000,000 to add to retained earnings. Currently the price of the stockis $50; the company pays a $2 per share dividend, which is expected togrow annually at 10 percent. If the company sells new shares, the net tothe company will be $48. Given this information, what is the: a.) cost of new common stock? The rate of interest on the firm’s long-term debt is 10 percent and thefirm is in the 32 percent income tax bracket. If the firm issues more than$2,400,000, the interest rate will rise to 11 percent. Given this information,what is the: b.) cost of debt?The management of a conservative firm has adopted a policy of neverletting debt exceed 30 percent of total financing. The firm will earn$10,000,000 but distribute 40 percent in dividends, so the firm will have$6,000,000 to add to retained earnings. Currently the price of the stockis $50; the company pays a $2 per share dividend, which is expected togrow annually at 10 percent. If the company sells new shares, the net tothe company will be $48. Given this information, what is the: a.) cost of retained earnings; The rate of interest on the firm’s long-term debt is 10 percent and thefirm is in the 32 percent income tax bracket. If the firm issues more than$2,400,000, the interest rate will rise to 11 percent. Given this information,what is the: b.) cost of debt in excess of $2,400,000?Last year Ann Arbor Corp had $155,000 of assets (which equals total invested capital), $305,000 of sales, $20,000 of net income, and a debt-to-total-capital ratio of 37.5%. The new CFO believes that a new computer program will enable the company to reduce costs and thus raise net income to $31,000. The firm finances using only debt and common equity. Assets, total invested capital, sales, and the debt-to-capital ratio would not be affected. By how much would the cost reduction improve the ROE? Do not round your intermediate calculations. a. 11.35 p.p. b. 15.14 p.p. c. 18.92 p.p. d. 20.65 p.p. e. 7.10 p.p.
- The capital budget forecast for the Santano Company is $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?Net IncomePayout a. $ 943,68858.41% b. $1,092,43667.62% c. $ 990,87261.34% d. $ 898,75055.63% e. $1,040,41564.40%New Doors Corp. has $375,000 of total assets, and it uses $187,500 of total shareholder's equity capital. Its sales for the last year were $520,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity (ROE) up to 15.0%. What profit margin (PM) would the firm need in order to achieve the 15% ROE, holding everything else constant? 1. 10.71% 2. 5.41% 3. 9.41% 4. 12.66% 5. 8.11%Last year ABC Company had $200,000 of total assets, $25,746 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt-to-total assets ratio to 45%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE (that is, new ROE - old ROE)? Round your answer to two decimal places of percentage. (Hint: ROE = net income/common equity) Group of answer choices 4.39% 4.47% 4.42% 4.53% 4.50%