OPTIMAL CAPITAL STRUCTURE Compugates Holdings is trying to deter- mine its optimal capital structure, which now consists of only common equity. The firm will add debt to its capital structure if it minimizes its WACC, but the firm has no plans to use preferred stock in its capital struc- ture. In addition, the firm's size will remain the same, so funds obtained from debt issued will be used to repurchase stock. The percentage of shares repurchased will be equal to the percentage of debt added to the firm's capital structure. (In other words, if the firm's debt-to-capital ratio increases from 0 to 25%, then 25% of the shares outstanding will be repurchased.) Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firm's debt cost at different debt levels: ST-3
The Effect Of Prepaid Taxes On Assets And Liabilities
Many businesses estimate tax liability and make payments throughout the year (often quarterly). When a company overestimates its tax liability, this results in the business paying a prepaid tax. Prepaid taxes will be reversed within one year but can result in prepaid assets and liabilities.
Final Accounts
Financial accounting is one of the branches of accounting in which the transactions arising in the business over a particular period are recorded.
Ledger Posting
A ledger is an account that provides information on all the transactions that have taken place during a particular period. It is also known as General Ledger. For example, your bank account statement is a general ledger that gives information about the amount paid/debited or received/ credited from your bank account over some time.
Trial Balance and Final Accounts
In accounting we start with recording transaction with journal entries then we make separate ledger account for each type of transaction. It is very necessary to check and verify that the transaction transferred to ledgers from the journal are accurately recorded or not. Trial balance helps in this. Trial balance helps to check the accuracy of posting the ledger accounts. It helps the accountant to assist in preparing final accounts. It also helps the accountant to check whether all the debits and credits of items are recorded and posted accurately. Like in a balance sheet debit and credit side should be equal, similarly in trial balance debit balance and credit balance should tally.
Adjustment Entries
At the end of every accounting period Adjustment Entries are made in order to adjust the accounts precisely replicate the expenses and revenue of the current period. It is also known as end of period adjustment. It can also be referred as financial reporting that corrects the errors made previously in the accounting period. The basic characteristics of every adjustment entry is that it affects at least one real account and one nominal account.
both pictures are the same question. please solve subsection d),e),f)
![Capital Structure, Dividend Policy,
Before- Tax
Cost of Debt
Debt- to-
Equity-
to-Capital
Ratio (w)
Equity Ratio
(D/E)
Debt- to-
Capital Ratio
(w.)
Bond Rating
(r)
AA
5.0%
1.00
0.0000
0.00
A
6.0
0.75
0.3333
0.25
1.0000
BBB
8.3
0.50
0.50
0.75
0.25
3.0000
BB
11.0
The firm has total capital of $5 million and 200,000 shares of common
stock outstanding. Its EBIT is $500,000 and will not change if debt, at any
of the levels shown in the table above, is added to the firm's capital struc-
ture. Compugates uses the CAPM to estimate its cost of common equity, r.
It estimates that the risk-free rate is 3.5%, the market risk premium is 4.5%,
and its tax rate is 35%. Compugates' current beta, which is b,, because it
has no debt, is 1.25.
a. Calculate the firm's interest expense, net income, shares outstanding,
and EPS for each of the capital structures shown in the table above.
b. At what capital structure is EPS maximized, and what is the firm's
EPS at this capital structure?
Calculate the after-tax cost of debt [r.(1- T)], beta (b, ), cost of equity (r),
and WACC for each of the capital structures shown in the table above.
d. Considering only the capital structures shown, at what capital
structure is WACC minimized and what is the WACC at this capital
С.
structure?
e. At what capital structure does the firm maximize shareholder value?
Is this the same capital structure selected in parts b and d? Explain
why it is, or why it isn't the same.
E As an analyst, what is your recommendation to the firm's manage-
ment regarding Compugates' capital structure?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7c335ddc-9ead-4b78-a500-1a1951db3036%2F02529ab5-b397-40dd-934e-de544334c2d7%2Fma2um4h_processed.jpeg&w=3840&q=75)
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