$80 million in debt to $125 million. The interest rate on debt is 9% and is not expected to change. The firm currently has 10 million shares outstanding and the price per share is $45.
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Nelco Inc. has decided in favour of a capital structuring that involves
increasing its existing $80 million in debt to $125 million. The interest
rate on debt is 9% and is not expected to change. The firm currently has 10
million shares outstanding and the price per share is $45. If the
restructuring is expected to increase the
EBIT that Nelco’s management must be expecting. Ignore taxes in your answer.
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- 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.Nelco Inc. has decided in favour of a capital structuring that involvesincreasing its existing $80 million in debt to $125 million. The interestrate on debt is 9% and is not expected to change. The firm currently has 10million shares outstanding and the price per share is $45. If therestructuring is expected to increase the ROE, what is the minimum level ofEBIT that Nelco’s management must be expecting. Ignore taxes in your answer.
- Widget Corp. 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 Widget Corp. proceeds with the recapitalization, which of the following items are also likely to increase? Check all that apply. Basic earning power (BEP) Cost of equity (rs) Net income Cost of debt (rd) Return on assets (ROA)Horizon Corporation has decided to a capital restructuring. This process of restructuring involves increasing its existing $80 million in debt to $125 million. However, the interest rate on the debt is 9 percent and it is not expected to change. The firm currently has 10 million shares outstanding, and the price per share is $60. If the restructuring is expected to increasethe return on equity (ROE), what is the minimum level for EBIT that Horizon’s management must be expecting? Ignore taxes in your answer.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)
- Stephens Electronics is considering a change in its target capital structure, which currently consists of 25% debt and 75% equity. The CFO believes the firm should use more debt, but the CEO is reluctant to increase the debt ratio. The risk-free rate, rRFrRF, is 5.0%, the market risk premium, RPM, is 6.0%, and the firm s tax rate is 40%. Currently, the cost of equity, rsrs, is 11.5% as determined by the CAPM. What would be the estimated cost of equity if the firm used 60% debt?Southern Timber Company expects to earn $10 million in EBIT in the coming year. After that, its EBIT is expected to grow by 4% per year in perpetuity. Southern Timber is currently an unlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel of professional financial experts indicates that the company can enjoy a tax shield benefit of $20 million in firm value if the company changes its capital structure by allowing a certain amount of debt. What would be the value of Southern Timber Company if it decides to undertake the capital structure suggested by these financial experts?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 ?
