You are analyzing the leverage of two firms and you note the following (all values in millions of dollars): Debt 497.6 Market Equity 398.1 80.5 38.3 Firm A Firm B a. What is the market debt-to-equity ratio of each firm? b. What is the book debt-to-equity ratio of each firm? c. What is the interest coverage ratio of each firm? d. Which firm will have more difficulty meeting its debt obligations? Book Equity 301.9 36.7 Operating Income 100.5 7.7 Interest Expense 49.9 6.7

You are analyzing the leverage of two firms and you note the following (all values in millions of dollars): Debt 497.6 Market Equity 398.1 80.5 38.3 Firm A Firm B a. What is the market debt-to-equity ratio of each firm? b. What is the book debt-to-equity ratio of each firm? c. What is the interest coverage ratio of each firm? d. Which firm will have more difficulty meeting its debt obligations? Book Equity 301.9 36.7 Operating Income 100.5 7.7 Interest Expense 49.9 6.7

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 7P

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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.
You are analyzing the leverage of two firms and you note the following (all values in millions of dollars): a. What is the market debt-to-equity ratio of each firm? b. What is the book debt-to-equity ratio of each firm? c. What is the interest coverage ratio of each firm? d. Which firm will have more difficulty meeting its debt obligations? a. What is the market debt-to-equity ratio of each firm? The market debt-to-equity ratio for Firm A is enter your response here . (Round to two decimal places.) Part 2 The market debt-to-equity ratio for Firm B is enter your response here . (Round to two decimal places.) Part 3 b. What is the book debt-to-equity ratio of each firm? The book debt-to-equity ratio for Firm A is enter your response here . (Round to two decimal places.) The book debt-to-equity ratio for Firm B is enter your response here . (Round to two decimal places.) Part 5 c. What is the interest coverage ratio of each firm? The interest coverage ratio for Firm A is enter…
You are analyzing the leverage of two firms and you noted the following (all values in millions of dollars) Debt Book Equity Market Equity Operating Income Interest Expense Firm A 65 75 80 45 12 Firm B 60 40 50 22 10 Which firm will be in a better position to provide a better interest cover?
Suppose your firm has a market value of equity is $500 million and a market value of debt is $475 million. What are the capital structure weights (i.e., weight of equity and weight of debt)? Group of answer choices A) weight of equity is 51.28%, , weight of debt is 48.72% B) weight of equity is 48.72%, , weight of debt is 51.28% C) weight of equity is 47.62%, , weight of debt is 52.38%
The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure. Q1. ________is the symbol that represents the cost of preferred stock in the weighted average cost of capital (WACC) equation. Q2. Avery Co. has $3.9 million of debt, $2 million of preferred stock, and $2.2 million of common equity. What would be its weight on debt? a. 0.27 b. 0.25 c. 0.48 d. 0.20 Q1. Option 1 rS or Option 2 rD or Option 3 rP or Option 4 rE Please provide the correct answers. Thank you!
You are analyzing the leverage of two firms and you noted the following (all values in millions of dollars) Debt Book Equity Market Equity Operating Income Interest Expense Firm A 65 75 80 45 12 Firm B 60 40 50 22 10 Which firm will be in a better position to provide a better interest cover? a. Firm A will better because its coverage ratio is 2.2 b. Both firms are equal in providing adequate interest coverage. c. Firm B will be better because its interest cover ratio is lower than that of firm A d. Firm A is better because it coverage ratio is higher (3.75) compared to firm B
2. Concatti Corporation hired your consulting firm to help them estimate the cost of equity. The yield on the firm's bonds is 10.50%, and your firm's economists believe that the cost of equity can be estimated using a risk premium of 4.85% over a firm's own cost of debt. What is an estimate of the firm's cost of equity from retained earnings?
Garwryk, inc., which is finance with debt and equity, presently has a debt ratio of 78 percent. What is the firm’s equity multiplier? How is the equity multiplier related to the firm’s use of debt financing (i.e., if the firm increased its use of debt financing would this increase or decrease its equity multiplier)? Explain What is the firm’s multiplier? The equity multiplier is given by: Equity multiplier =1 1-debt ratio The equity multiplier is Round to two decimal places
You have the following initial information on which to base your calculations and discussion: Debt yield = 2.5% Required Rate of Return on Equity = 13% Expected return on S&P500 = 8% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations.
You have the following initial information on which to base your calculations and discussion: Debt yield = 2.5% Required Rate of Return on Equity = 13% Expected return on S&P500 = 8% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations. b. What would the levered cost of equity equal for this firm at a debt-equity ratio (D:E) of 3:1? c. What would the required rate of return for the company equal if it were to be acquired under the leveraged buyout structure (i.e., what would the estimated firm WACC equal to under a…
Can you explain the information below market value added (MVA) analysis and interpretation of results below. Market Value of Equity:$133,341,000,000.00 Plus: Market Value of Debt:$13,677,000.00 Equals: Market Value of Firm:$133,354,677,000.00 Minus: Total Invested Capital:($1,944,100.00) Equals: MVA$133,356,621,100.00
The basic WACC equation The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure. is the symbol that represents the cost of preferred stock in the weighted average cost of capital (WACC) equation. Raymond Co. has $1.4 million of debt, $3 million of preferred stock, and $1.2 million of common equity. What would be its weight on debt? 0.59 0.25 0.49 0.21