The firm is considering an(Adjusting a firm's capital structure) Curley's Fried Chicken Kitchen operates two southern cooking restaurants in St. Louis, Missouri, and has the following financial structure: Eexpansion that would involve raising an additional $2.3 million.a. What are the firm's debt ratio and interest-bearing debt ratio in its present capital structure?b. If the firm wants to have a debt ratio of 50 percent, how much equity does the firm need to raise in order to finance the expansion?%. (Round to one decimal place.)a. The firm's debt ratio isData Table%. (Round to one decimal place.)The firm's interest-bearing debt ratio isb. If the firm wants to have a debt ratio of 50%, the equity the firm needs to raise is $(Round to the nearest dollar.)$118,000 2390,000Accounts payableShort-term debt$508,000Current liabilitiesLong-term debtOwner's equity2,158,0001,594,000$4,260,000Total

a) Debt ratio of the firm is it total liabilities divided by total assets.

Answered: The firm is considering an (Adjusting a…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 25P

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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: 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.
An all-equity firm will spend $1,500,000 to expand the business. It has $100,000 in cash, can borrow up to $900,000, and can issue up to $1,000,000 in new equity. If the firm applies the pecking order theory of capital structure, what percentage of the expansion will be financed with debt?
Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 26% of the company’s present value, and you believe that at this capital structure the company’s debt holders will demand a return of 6% and stockholders will require 13%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 21%) will be $64 million and that investment in plant and net working capital will be $26 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year. a. What is the total value of Icarus? b. What is the value of the company’s equity? (For all the requirements, do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)
Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Debt/Capital Ratio Projected EPS Projected Stock Price 20% $3.15 $32.50 30 3.50 36.00 40 3.75 38.00 50 3.55 32.00 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? Choose from the options provided above. Round your answers to two decimal places. % debt % equity At what debt-to-capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to two decimal places. %
Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Debt/Capital Ratio Projected EPS Projected Stock Price 20% $3.10 $34.24 30% 3.55 36.00 40% 3.7 35.50 50% 3.55 34.00 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? At what debt-to-capital ratio is the company's WACC minimized?
Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 30% of the company's present value, and you believe that at this capital structure the company's debtholders will demand a return of 6% and stockholders will require 11%. The company is forecasting that next year's operating cash flow (depreciation plus profit after tax at 21%) will be $68 million and that investment in plant and net working capital will be $30 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year. What is the total value of Icarus? What is the value of the company's equity?
carus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 25% of the company’s present value, and you believe that at this capital structure the company’s debt holders will demand a return of 7% and stockholders will require 14%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 21%) will be $63 million and that investment in plant and net working capital will be $25 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year. a. What is the total value of Icarus? ______ Million b. What is the value of the company’s equity? ______ Million (For all the requirements, do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)
The Sprite Toy Company needs to raise funds for a major expansion of its manufacturing operations. Sprite has determined that it will issue $100 millionof financing, but it has not decided whether to issue debt or equity. The companyis publicly traded.a. Based on the information given in Table 3-3, compute the flotation costs thatSprite would incur if it raises the needed funds by issuing equity only.b. Based on the information given in Table 3-3, compute the flotation costs thatSprite would incur if it raises the needed funds by issuing straight debt only.c. If Sprite wants to keep its flotation costs low, which form of financingshould it use? Discuss some factors other than flotation costs that thecompany should consider. TABLE 3-3 Flotation (Issuance) Costs for Issuing Debt and EquityaIssue Size Bondsb Equityc($ millions) Straight Convertible Seasoned Issues IPOsUnder…
Halfdome believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 25%. Halfdome must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of . New common stock in an amount up to $8 million would have a cost of . Furthermore, Halfdome can raise up to $4 million of debt at an interest rate of and an additional $5 million of debt at . The CFO estimates that a proposed expansion would require an investment of $8.2 million. What is the weighted average cost of capital (WACC) for the last dollar raised to complete the expansion? (Assume that cost of debt is 9% and cost of equity is 12.5%). 12.69% 8.45% 10.32% 9.91% None of the above
An investor is considering starting a new business. The company would require $500,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 15.0% return on the invested capital, which means that the firm must have an ROE of 15.0%. How much net income must be expected to warrant starting the business?
You are reviewing the valuation of Vulcan Enterprises, a private business. The analyst has estimated a value of $ 2.0 million for the company, which is in stable growth and expected to grow 3% a year in perpetuity. The firm has no debt outstanding and is expected to generate an after-tax operating income of $300,000 next year; the return on capital is anticipated to be 15%. The analyst valued the company for a private-to-private transaction, and the cost of equity he estimated is correct, given that setting. (He used a total beta to estimate the cost of equity, a risk-free rate of 4%, and an equity risk premium of 5%).However, the buyer is a publicly-traded firm with diversified investors. The average R-squared across publicly traded companies in this business is 25%. Estimate the correct value of Vulcan Enterprises for sale to a public buyer.
Tropical Tours is considering an expansion of its operations, which will require the company to issue new debt and equity. Tropical’s investment banker provided the following information about the cost of issuing new debt: If Tropical’s capital structure consists of 60 percent debt, what WACC break points are associated with issuing new debt? Kindly answer with explanation.

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