Your answer is incorrect. 0/1 E Carla Vista Theatres Inc. operates specialty film format theatres that display images of greater size and higher-quality resolution. Carla Vista is considering expanding its theatres in China and needs to raise $459 million in additional debt. However, the company is concerned about remaining compliant with its existing debt to equity ratio covenant of 1.10:1 and the net debt as a percentage of capitalization ratio of 50%. For the fiscal year ended December 31, 2024, an extract of the statement of financial position for Carla Vista Theatres showed the following information: total interest-bearing debt of $648 million, a cash balance of $90 million, and shareholders' equity of $900 million. Determine whether Carla Vista Theatres Inc. could borrow $459 million and remain in compliance with the bank covenants. (Round debt to equity ratio to 2 decimal places, e.g. 1.25:1 and net debt as a percentage of total capitalization to O decimal places, e.g. 35%.) Debt to equity Net debt as a percentage of total capitalization Carla Vista Theatres cannot borrow $459 Million. :1 38 % 1

Your answer is incorrect. 0/1 E Carla Vista Theatres Inc. operates specialty film format theatres that display images of greater size and higher-quality resolution. Carla Vista is considering expanding its theatres in China and needs to raise $459 million in additional debt. However, the company is concerned about remaining compliant with its existing debt to equity ratio covenant of 1.10:1 and the net debt as a percentage of capitalization ratio of 50%. For the fiscal year ended December 31, 2024, an extract of the statement of financial position for Carla Vista Theatres showed the following information: total interest-bearing debt of $648 million, a cash balance of $90 million, and shareholders' equity of $900 million. Determine whether Carla Vista Theatres Inc. could borrow $459 million and remain in compliance with the bank covenants. (Round debt to equity ratio to 2 decimal places, e.g. 1.25:1 and net debt as a percentage of total capitalization to O decimal places, e.g. 35%.) Debt to equity Net debt as a percentage of total capitalization Carla Vista Theatres cannot borrow $459 Million. :1 38 % 1

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....

See similar textbooks

Similar questions

AAA Inc. has a current debt-to-equity ratio of 3, and is considering expanding its operations into a new industry. Firms in this new industry face a different set of risks than AAA Inc. However, the executives at AAA Inc. observe that a company in the new industry (BBB Inc.) has a cost of equity of 14%, a cost of debt of 7%, and a debt-to-value ratio of 40%. AAA Inc. plans to finance its expansion into the new industry with 50% debt and 50% equity. The cost of debt for AAA Inc. is also 7%, and the corporate tax rate is 25%. Solve for the discount rate that AAA Inc. should use when evaluating whether to go forward with the expansion
Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $200 million and a YTM of 5.8 percent. The company’s market capitalization is $440 million and the required return on equity is 11 percent. Joe’s currently has debt outstanding with a market value of $33.5 million. The EBIT for Joe’s next year is projected to be $13 million. EBIT is expected to grow at 8 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 7 percent, 13 percent, and 6 percent, respectively. Joe’s has 2.15 million shares outstanding and the tax rate for both companies is 21 percent. a. What is the maximum share price that Happy Times should be willing to pay for…
Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $200 million and a YTM of 5.8 percent. The company’s market capitalization is $440 million and the required return on equity is 11 percent. Joe’s currently has debt outstanding with a market value of $33.5 million. The EBIT for Joe’s next year is projected to be $13 million. EBIT is expected to grow at 8 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 7 percent, 13 percent, and 6 percent, respectively. Joe’s has 2.15 million shares outstanding and the tax rate for both companies is 21 percent. a.What is the maximum share price that Happy Times should be willing to pay for…
Reed plc is considering how to improve its debtor collection policy. The following information is available. Current Credit Sales: £912,000 Average debtor collection period (days): 94 days Wishing to introduce a new policy of payment within (days): 60 days Anticipated reduction in sales per year: £40,000 Increased collection costs per yer: £2,000 Short-term cost of borrowing (%): 30% Sales contribution to profit: 20% Required What will be the net benefit if Reed successfully enforces the new policy? When a corporation raises finance, there are two options: long-term debt finance (bank loan or corporate bonds) and equity finance (ordinary shares). The two approaches have fundamental consequences to the corporation. What are the main differences between the two approaches?
Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe's Party Supply. Happy Times currently has debt outstanding with a market value of $220 million and a YTM of 5.8 percent. The company's market capitalization is $460 million and the required return on equity is 12 percent. Joe's currently has debt outstanding with a market value of $34.5 million. The EBIT for Joe's next year is projected to be $14 million. EBIT is expected to grow at 10 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 9 percent, 15 percent, and 8 percent, respectively. Joe's has 2.25 million shares outstanding and the tax rate for both companies is 23 percent. a. What is the maximum share price that Happy Times should be willing to pay for…
Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $120 million and a YTM of 6.8 percent. The company’s market capitalization is $260 million and the required return on equity is 15 percent. Joe’s currently has debt outstanding with a market value of $25.5 million. The EBIT for Joe’s next year is projected to be $17 million. EBIT is expected to grow at 10 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 9 percent, 15 percent, and 8 percent, respectively. Joe’s has 2.15 million shares outstanding and the tax rate for both companies is 25 percent. a.What is the maximum share price that Happy Times should be willing to pay for…
Auto Inc., an automobile manufacturer with a current debt-to-equity ratio of 2, is considering expanding its operations to produce bicycles. Unsurprisingly, the bicycle industry faces a different set of risks than the automobile industry. However, the executives at Auto Inc. observe that Bike Inc., a bicycle company, has a cost of equity of 16%, a cost of debt of 6%, and a debt-to-value ratio of 60%. Auto Inc. plans to finance its expansion into bicycle production with 20% debt and 80% equity. The cost of debt for Auto Inc. is also 6%, and the corporate tax rate is 25%. Solve for the discount rate that Auto Inc. should use when evaluating whether to go forward with the expansion. Note: Auto Inc. does not want to use the Adjusted Present Value method.
Minden Co. has unsecured debt of $1,500,000 that carries interest at 10%. If Minden Co. was able to offer land and buildings with an appraised value of $2 million as security for the debt, the interest rate should * a) decrease because of reduced risk b) decrease because of higher profits c) decrease because of a higher interest cover ratio d) increase because of risk e) none of the above Capacity : a) cannot be changed in the short run b) can be changed in the long run c) is completely under the control of management d) (a) & (b), but not (c) e) (a), (b) & (c)
Micolash Industries plans to reduce the use of debt financing and increase the use of equity financing (for example, move from a 70% Debt-to-Capital Ratio to 50%). Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate (say 40%) all remain constant. Which of the following would occur? Group of answer choices The company’s interest expense would remain constant. The company would have less common equity than before. The company’s taxable income (EBT) would fall. The company would have to pay more taxes. The company’s net income would decrease.
Lente, a manufacturer of energy-efficient lighting solutions, has had such success with its new products that it is planning to substantially expand its manufacturing capacity with a P15 million investment in new machinery. Lente plans to maintain its current 30% debt-to-total-assets ratio for its capital structure and to maintain its dividend policy in which at the end of each year it distributes 55% of the year’s net income. This year’s net income was P8 million. How much external equity must Lente seek now to expand as planned?
Certain financial ratios for The Gap for its most recent year are given below, along with the average ratios for its industry. Based on those ratios, answer the following. 1) Does The Gap seem to prefer to finance its assets with debt or with equity? How can you tell? What percent of its assets are funded with debt? What percent of its assets are funded with equity? 2) A supplier to The Gap sells merchandise to The Gap and asks to be paid within 60 days. While any of The Gap’s financial ratios might be of interest to the supplier, which of the ratios listed below do you think would likely be the most important one to the supplier? Why? 3) Which of the ratios presented suggest that, compared to its industry, The Gap may have a problem controlling its operating expenses? How can you tell? Your answer should clearly indicate that you understand why the ratio that you chose answers this question. Here is the data for The Gap and its industry. Financial Ratios…
TUV Hardware Stores is a major retailer of lumber and building products. They are privately owned but professionally managed. Recently, they took out a bank loan to build a new robotic warehouse. Debt to equity is now .2:1, and the bank has asked for financial statements. They have approached your audit firm to provide some assurance based on your excellent reputation. Each retail store is franchised and there are no corporate-owned stores. In 2020, franchise fees are expected to be $176 million while wholesale sales to stores are expected to be $2,416 million and wholesale sales direct to major builders are expected to be $203 million. Gross profit on wholesale sales is around 5%. The franchise fee goes to such things as store support (training, point of sale inventory, pricing systems) and advertising, and a 20% profit. TUV has operations across Canada with major warehouses in Vancouver, Winnipeg, Brampton, and St. John, New Brunswick. The new warehouse will be built in Kitchener.…