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?
Q: Problem # 2 (3/10): A cash flow sequence has a disbursement of $15,000 today, followed by three…
A: In a non simple, unconventional series of cash flows, we have to find the approximate-ERR.
Q: what is the importance of cash flow management when evaluating proposals for capital expenditure?
A: The cash flow management is related to management of inflows of cash and outflows of cash with…
Q: 5. 6. 7. Miranda wants to calculate the monthly payment for a loan to purchase the Beecher Street…
A: To figure out how much a loan will cost, use the loan payment formula. The formula for calculating…
Q: (a) How many shares would you have at the end of June 30, 2000, if you did not sell any shares? (b)…
A: Shares represent fractional ownership in a company. Investors and buyers who buy shares of a company…
Q: You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a…
A: Beta of one stock = 1.24 Total no. of stocks in the portfolio = 3 Weights of each stock = 1/3 =…
Q: What is the accumulated sum of $12 a year for the next 8 years compounded annually at 10%?
A: The amount that a present investment will gain in value over time when kept in a compound interest…
Q: How much money would you need to deposit today at 7% annual interest compounded quarterly to have…
A: Given: Future Value of deposit "FV" = P16000 Annual interest rate = 7% Number of compounding "m" =…
Q: years
A: Rate of interest r= 3% compounded annually, Given the t time period,t = 7 years, Which means…
Q: What is a share buyback? A) An opportunity for the company to increase dividends without sending a…
A: Share Buyback is a share repurchase wherein a company buys back its own shares from the marketplace…
Q: Louis Winthorpe III was evaluating investment opportunities to determine what he should do with his…
A: Honor code: Since you have posted a question with multiple sub-parts, we will solve the first three…
Q: Last year, Noan's Coffee Shop had Sales of $36,200; and equity of $21,300. The firm's return on…
A: Return on equity is an important financial ratio. This ratio is based on the relationship between…
Q: in wholesale credit market, commercial banks only focus on the price rationing strategy. is this…
A: Introduction: Yes True, Yes, this is true. In wholesale credit market, commercial banks only focus…
Q: s the limitations of ratio analysis as a tool for str
A: Ratio analysis is used quite often in the decision making but many time that results in quite bad…
Q: Because of a job change, Seth Armstrong has just relocated to the southeastern United States. He…
A: Add on interest method of calculating monthly payment is more expensive if the rate of interest is…
Q: AR company has the following financial statement information: Item Inventory Accounts receivable…
A: Here, Particulars Values Opening inventory $ 7,800.00 Ending inventory $…
Q: The price of a stock, which pays no dividends, is $30 and the strike price of a three-year European…
A: Given: Particulars Amount Spot price $30 Strike price $27 Risk free rate 8% Years 3
Q: Covidam Company clinches a contract to supply cleaning services to a nursing home for the next 5…
A: As per our guidelines, we are supposed to answer only 3 sub-parts (if there are multiple sub-parts…
Q: What’s the present value of a perpetuity that pays $1500 per year if the appropriate interest rate…
A: Cash flow per year is $1500 The interest rate is 15% To Find: the present value of a perpetuity
Q: able ets 75,000 20,000 45,000
A: The return on total asset is reflective of the ratio which depicts the return on the sum of total…
Q: If economy booms, RTF, Inc. stock is expected to return 11 percent. If the economy goes into a…
A: State of Economy Probability RTF (R) BOOM 73% 11% Recession 27% 3% To Find: Variance
Q: Information for two alternative projects involving machinery investments follows. Project 1 requires…
A: The difference between the current value of cash inflows and outflow of cash over a period of time…
Q: A share of stock's expected dividends is $3 per share and the expected price in 1 year is $81 per…
A: Dividend is $3 Expected price in year $81 Current price is $75.
Q: 5. If money is worth 10% compounded quarterly, calculate the present value of a deferred annuity on…
A: A deferred annuity is a type of annuity where the first periodic payment begins at a later date. The…
Q: a. P1,320 b. P1,440 C. d. P2,640 P2,880
A: Given in the question
Q: you sign a discount note for $9,500 at a bank discount rate of 9% for 3 months, what is the…
A: The notes are issued at discount to the original face value of note and that discount is based on…
Q: As a result of a slowdown in operations, Mercantile Stores is offering to employees who have been…
A: The present value is the current value of the amount that is expected to be received in future. It…
Q: Pedro bought a new car today from Barboncito Motors. The former proposed to pay the latter the…
A: The monthly payment on a loan refers to the repayment amount extended by the borrower to the lender…
Q: NoNuns Cos. has a 25 percent tax rate and has $302.40 million in assets, currently financed entirely…
A: Expected EPS is caluclated as the sum of the product of probability percentage and EPS in each stae.…
Q: On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November…
A: We have a long position in future contract, which is closed out a month ahead. We have to find the…
Q: Discuss the risk–return relationship involved in the firm’s asset-investment decisions as that…
A: Risk and reward in investing are highly interrelated. More potential gains on investing typically…
Q: You have been appointed as a financial consultant by the directors of Cochin Holdings. They require…
A: The cost of capital refers to the minimum profit that needs to be generated by the company. It is to…
Q: the annuity factor is 3.7908
A: Data given n=5 rate%=10%
Q: Sarafina is making monthly payments into an annuity. She wants to have $900 in the fund to buy a new…
A: Future value of annuity With periodic interest rate (r), period (n) and annuity (PMT), the future…
Q: Suppose a bank offers you a 10% interest rate on a 25-year mortgage to be paid back with monthly…
A:
Q: Instead of investing the entire $1,062,000, Bogut invests $278,000 today and plans to make 9 equal…
A: The 9 equal annual investments are an annuity. The sum of future value of this annuity and the…
Q: You enter into a 9-month forward contract on a non-dividend paying stock when the stock price is £38…
A: Given: Spot price = £38 Periods = 9 months Interest rate = 10%
Q: A.4. The 6-month annualized spot rate today is 2.75%. A new futures 6-month contract on Repsol's…
A: We have several forward contracts here. Spot rate is known. We need to find the spot price and the…
Q: In early May 2021, you could buy a new 2021 Toyota RAV4 LE SUV with list price of $27,425 with a…
A: A loan is a financial arrangement in which one or more people, companies, or other entities lend…
Q: You are considering adding a new software title to those published by your highly successful…
A: The company may need to evaluate whether to continue with the old machine or replace the old machine…
Q: 9%, Monthly payments of $200 are paid into an annuity beginning on January 31, with a yearly…
A: Annuity is a series of cash follows which occur on a regular interval for a defined period. Ordinary…
Q: Jim and Ann bought a house with a down payment of $16,000 and a $158,000 loan. The loan was for 25…
A: A mortgage is a covered loan provided specifically for the purchase or maintenance of the real…
Q: A floating rate mortgage loan is made for $120,000 for a 30-year period at an initial rate of 12…
A: A loan is a financial arrangement in which one or more people, companies, or other entities lend…
Q: •Assume that there are 3 stocks in the market. • Share outstanding and prices are as follows. Stock…
A: A price weighted index of a market is the stock marlet index in which each company in the stock…
Q: You have a policy with a $1,000 deductible, 80/20 co-insurance, and a $7,500 maximum OOP. You…
A: As per our guidelines, we are supposed to answer only 3 sub-parts (if there are multiple sub-parts…
Q: LG 2 (PS-4) Future values For each of the cases shown in the following table, calculate the future…
A: Future value is calculated when investors want to know how much their investment will be worth after…
Q: Julia's Motorcycles Inc. produces one model of motorcycle, called the Lightning. The Lightning has…
A: The break even situations are the such that there is no loss and no profit and revenue is just equal…
Q: What is the difference between a dividend and a stock repurchase? Why have stock repurchases…
A: Dividend -Distribution of a company's earning to its shareholders is known as dividend. Stock…
Q: HBM, Inc has the following capital structure: Assets $550,000 Debt Preferred stock Common stock…
A: WACC refers to the weighted average cost of capital. It takes into consideration the cost of all the…
Q: So-called subprime mortgages were typically all of the following, except for mortgages granted to…
A: Subprime mortgages are mortgages that are given to those individuals who will most likely have…
Q: Calculate the interest on AED 5,520 at 2.8% compounded annually for 4 years.
A: GIven Investment is AED 5,520 Rate is 2.8%
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?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
- 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.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?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
- 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 have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)You have the following initial information on which to base your calculations and discussion: Debt yield = 2.6% Required Rate of Return on Equity = 12% Expected return on S&P500 = 10% 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…
- 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.concatti corporation hired your consulting firm to help them estimate the cost of equity. the yeild on the firms bonds is 10.50% and your firms economist believe that the cost of equity can be estimated using a risk premium of 4.85% over a firms own cost of debt. what is an estimate of the firms cost of equity from retained earnings?You have the following initial information on CMR Co. on which to base your calculationsand discussion for questions 1) and 2):• Current long-term and target debt-equity ratio (D:E) = 1:4• Corporate tax rate (TC) = 30%• Expected Inflation = 1.75%• Equity beta (E) = 1.6385• Debt beta (D) = 0.2055• Expected market premium (rM – rF) = 6.00%• Risk-free rate (rF) = 2.15%1) The CEO of CMR Co., for which you are CFO, has requested that you evaluate apotential investment in a new project. The proposed project requires an initial outlay of$7.15 billion. Once completed (1 year from initial outlay) it will provide a real net cashflow of $575 million in perpetuity following its completion. It has the same business riskas CMR Co.’s existing activities and will be funded using the firm’s current target D:Eratio.a) What is the nominal weighted-average cost of capital (WACC) for this project?
- You have the following initial information on Financeur Co. on which to base your calculationsand discussion for questions 1) and 2):• Current long-term and target debt-equity ratio (D:E) = 1:3• Corporate tax rate (TC) = 30%• Expected Inflation = 1.55%• Equity beta (E) = 1.6325• Debt beta (D) = 0.203• Expected market premium (rM – rF) = 6.00%• Risk-free rate (rF) =2.05%1) The CEO of Financeur Co., for which you are CFO, has requested that you evaluate apotential investment in a new project. The proposed project requires an initial outlay of$7.25 billion. Once completed (1 year from initial outlay) it will provide a real net cashflow of $556 million in perpetuity following its completion. It has the same business riskas Financeur Co.’s existing activities and will be funded using the firm’s current target D:Eratio.a) What is the nominal weighted-average cost of capital (WACC) for this project?b) As CFO, do you recommend investment in this project? Justify your answer(numerically).A company needed ghc 1000 to finance its activities. The firm can financed this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghc 160 in good years and ghc80 in bad years. Assuming the firm faces equal probability of good and bad years; i What will be the stream of returns on both bonds and equity if the company chooses the following financing options a 100% equity financing b 50% equity financing c 20% equity financing d 0% equity financing ii Estimate the equity risk associated with each option in (i) iii As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why????LCG Distribution Company is in the process of setting its target capital structure. The CFO believes that the optimal debt ratio is somewherebetween 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels:Debt Ratio Projected EPS Projected Stock Price20% P3.20 P35.0030% 3.45 36.5040% 3.75 36.2550% 3.50 35.50Assuming that the firm uses only debt and common equity,1. What is LCG’s optimal capital structure? ___________ 2. What debt ratio is the company’s WACC minimized? ___________
