DIRECTIONS. Analyze the situation and answer the question on a separate sheet of раper. One of the VP for Finance of the Financial Manager is to determine the appropriate capital structure of the company. To illustrate, show/draw the figure below: Sample Capital Structure 100% 75% |Equity 50% Assets 25% Liabilities 0% Total Assets Total Structure In the figure above, the total assets are financed by 60% debt and 40% equity. Accordingly, the capital structure is 60% debt and 40% equity. Question: Do you think there is an ideal mix of debt and equity across corporations? Elaborate your answer.

DIRECTIONS. Analyze the situation and answer the question on a separate sheet of раper. One of the VP for Finance of the Financial Manager is to determine the appropriate capital structure of the company. To illustrate, show/draw the figure below: Sample Capital Structure 100% 75% |Equity 50% Assets 25% Liabilities 0% Total Assets Total Structure In the figure above, the total assets are financed by 60% debt and 40% equity. Accordingly, the capital structure is 60% debt and 40% equity. Question: Do you think there is an ideal mix of debt and equity across corporations? Elaborate your answer.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 5P

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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.
CALCULATING 3Ms COST OF CAPITAL In this chapter, we described how to estimate a companys WACC, which is the weighted average of its costs of debt, preferred stock, and common equity. Most of the data we need to do this can be found from various data sources on the Internet. Here we walk through the steps used to calculate Minnesota Mining Manufacturings (MMM) WACC. 3. Next, we need to calculate MMMs cost of debt. We can use different approaches to estimate it. One approach is to take the companys interest expense and divide it by total debt (which is the sum of short-term debt and long-term debt). This approach only works if the historical cost of debt equals the yield to maturity in todays market (i.e., if MMMs outstanding bonds are trading at close to par). This approach may produce misleading estimates in years in which MMM issues a significant amount of new debt. For example, if a company issues a great deal of debt at the end of the year, the full amount of debt will appear on the year-end balance sheet, yet we still may not see a sharp increase in annual interest expense because the debt was outstanding for only a small portion of the entire year. When this situation occurs, the estimated cost of debt will likely understate the true cost of debt. Another approach is to try to find this number in the notes to the companys annual report by accessing the companys home page and its Investor Relations section. Alternatively, you can go to other external sources, such as bondsonline.com, for corporate bond spreads, which can be used to find estimates of the cost of debt. Remember that you need the after-tax cost of debt to calculate a firms WACC, so you will need MMMs tax rate (which has averaged around 30% in recent years). What is your estimate of MMMs after-tax cost of debt?
You are considering two possible companies for investment purposes. The following data is available for each company. Additional Information: Company A: Bad debt estimation percentage using the income statement method is 6%, and the balance sheet method is 10%. The $230,000 in Other Expenses includes all company expenses except Bad Debt Expense. Company B: Bad debt estimation percentage using the income statement method is 6.5%, and the balance sheet method is 8%. The $140,000 in Other Expenses includes all company expenses except Bad Debt Expense. A. Compute the number of days sales in receivables ratio for each company for 2019 and interpret the results (round answers to nearest whole number). B. If Company A changed from the income statement method to the balance sheet method for recognizing bad debt estimation, how would that change net income in 2019? Explain (show calculations). C. If Company B changed from the balance sheet method to the income statement method for recognizing bad debt estimation, how would that change net income in 2019? Explain (show calculations). D. What benefits do each company gain by changing their method of bad debt estimation? E. Which company would you invest in and why? Provide supporting details.
To get an overall picture of each companys capital structure, it is helpful to look at a chart that summarizes the companys capital structure over the past decade. To obtain this chart, choose a company to start with and select FINANCIALS. Next, select MORE THOMSON REPORTS CHARTSCAPITAL STRICTURE. This should generate a chart that plots the companys total long-term debt, total common equity, and total current liabilities over the past decade. What, if any, are the major trends that emerge when youre looking at these charts? Do these companies tend to have relatively high or relatively low levels of debt? Do these companies have significant levels of current liabilities? Have their capital structures changed over time?
You are given the following information concerning a firm:Assets required for operation: $5,600,000Revenues: $8,700,000Operating expenses: $7,900,000Income tax rate: 40%. Management faces three possible combinations of financing: 100% equity financing 35% debt financing with a 8% interest rate 70% debt financing with a 8% interest rate What is the net income for each combination of debt and equity financing? Round your answers to the nearest dollar. 1 2 3 Net income $ $ $ What is the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. 1 2 3 Return on equity % % % If the interest rate had been 16 percent instead of 8 percent, what would be the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. 1 2 3 Return on equity % % % What is the implication of the use of financial leverage…
You are given the following information concerning a firm: (please show work) Assets required for operation: $5,000,000 Revenues: $8,400,000 Operating expenses: $7,900,000 Income tax rate: 40%. Management faces three possible combinations of financing: 100% equity financing 30% debt financing with a 6% interest rate 60% debt financing with a 6% interest rate a) What is the net income for each combination of debt and equity financing? b) What is the return on equity for each combination of debt and equity financing? c) If the interest rate had been 12 percent instead of 6 percent, what would be the return on equity for each combination of debt and equity financing?
An accountant for Stability Inc. must calculate the weighted average cost of capital of the corporation using the following information. Interest Rate Accounts payable $35,000,000 0 Long-term debt 10,000,000 8% Common stock 10,000,000 15% Retained earnings 5,000,000 18% What is the weighted average cost of capital of Stability? Select one: a. 10.25% b. 6.88% c. 12.80% d. 8.00%
Ilumina Corp is trying to determine its optimal capital structure. The company’s capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: Percent financed with debt (wd) Percent financed with equity (wc) Debt-to-equity ratio (D/S) After-tax cost of debt (%) 0.25 0.75 0.25/0.75 = 0.33 6.9% 0.35 0.65 0.35/0.65 = 0.5385 7.1% 0.50 0.50 0.50/0.50 = 1.00 8.0% The company uses the CAPM to estimate its cost of common equity, rs. The risk-free rate is 5% and the market risk premium is 6%. Ilumina estimates that its beta with 10% debt is 1. The company’s tax rate, T, is 40%. On the basis of this information, what is the company’s optimal capital structure, and what is the firm’s cost of capital at this optimal capital structure? (Please show work)
Aaron Athletics is trying to determine its optimal capital structure. The company’s capital structure consists of debt and common equity. In order to estimate the cost of capital at various debt levels the company has constructed the following table: Percent financed with debt (wD) Percent financed with equity (ws) Before tax cost of debt 0.10 0.90 7.0% 0.20 0.80 7.2% 0.30 0.70 8.0% 0.40 0.60 8.8% 0.50 0.50 9.6% The company uses the CAPM to estimate its cost of equity, rS . The risk-free rate is 4% and the market risk premium is 5%. Aaron estimates that if it had no debt its beta would be 1.0. (It’s unlevered beta equals 1.0). The company’s tax rate is 40%. On the basis of this information, what is the company’s optimal capital structure, and what is the WACC at that capital structure? (Show your calculations at each debt level).
Kellogg’s CFO is in the process of determining the firm’s WACC and needs to figure out the weights of the various types of capital sources. Accordingly, she starts by collecting information from the balance sheet and the capital markets, and makes up the table shown below: Component Balance Sheet Value Number Outstanding Current Market Price Market Value Debt $150,000,000 150,000 $1,075 Preferred Stock $ 45,000,000 1,500,000 $40 Common Stock $180,000,000 4,500,000 $45.57 Corporate tax rate = 30% is Tc Before tax cost of debt = 7.6% Rd Cost of Equity = 11.36% Re Based upon the above information, calculate the firm’s weighted average cost of capital.
Hello. I need help with the following question please. Taylor Company has a target capital structure that consists of $3.3 million of debt capital, $2.5 million of preferred stock financing, and $2.8 million of common equity. The corresponding weights of its debt, preferred stock, and common equity financing that should be used to compute its weighted cost of capital (rounded to the nearest wo decimal places) are: 38.37%, 29.07%, and 32.56%, respectively 32.04%, 34.53%, and 33.43%, respectively 29.07%, 32.56%, and 38.37%, respectively 34.53%, 33.43%, and 32.04%, respectively Consider the following case: Mason Limited, a key competitor of Taylor Company in the construction field, has a capital structure consisting of 45% debt, 5% preferred stock, and 50% common equity. Concerned that its cost of capital may put it at a competitive disadvantage vis-a-vis the Taylor Company, a Mason analyst has been tasked with computing and comparing the weighted costs…
You are given the following data: EBIT : OMR 500,000 Shareholders funds : OMR 1200,000 Non current liabilities : OMR 800,000 Then return on capital employed is