1)
Introduction: The debt-to-equity (D/E) ratio measures a company's reliance on debt by comparing its total liabilities to its shareholder equity. A larger D/E ratio denotes greater risk, whereas a particularly low one can signify that a company is not utilizing debt funding for expansion.
(a) Debt to equity ratio
(b) Debt to equity ratio after borrowing $500,000
2)
Introduction: The debt-to-equity (D/E) ratio measures a company's reliance on debt by comparing its total liabilities to its shareholder equity. A larger D/E ratio denotes greater risk, whereas a particularly low one can signify that a company is not utilizing debt funding for expansion.
Financial structure becomes less risky or riskier after borrowing.
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FINANCIAL & MANAGERIAL ACCOUNTING (ACCES
- To assist with evaluating potential capital projects, Carrium Insights Inc. is seeking to determine its actual Weighted Average Cost of Capital (WACC). Utilising information from the financial statements, together with current information, the Finance Manager has compiled the following information as it pertains to the company’s capital structure: Debt: Bonds outstanding has a face value of $568,000,currently selling at 95% of par. These bonds have 20 years left to maturityandacoupon rate of 7.55%.(Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 21,000 shares of common stock outstanding with a market price of $63.00.The company just paida dividend of $6.00; for ease of computation, dividends are expected to grow by 5% annually. Preferred stock:The company intends to offer 15,000 shares of preferred stock to the public at a price of $25.00 per share. The intention is to pay an annual dividend of $3.00. Additional Information: ✓The Company’s…arrow_forwardSyndicate Ltd. is re-evaluating the rate of return demanded by its investors for new projects with the following projects being reviewed by the board for possible investment: Investment Investment Cost ($) Rate of Return (%) A 1,500,000 15 B 2,000,000 12 C 5,000,000 9 D 750,000 6 The latest balance sheet for Syndicate Ltd shows: Long Term Debt Book Value ($) Bonds: Issued at par: $100 5,000,000 Annual coupon of 6% 4 years to maturity Equity Preference Shares: 1,000,000 100,000 shares issued Ordinary Shares: 4,000,000 1,000,000 shares issued The company’s bank has advised that…arrow_forwardWhich of the following should be considered when a company estimates the cash flows used to analyze a proposed project? A. The company spent and expensed $10 million on a marketing study before its current analysis regarding whether to accept or reject the project. B. The company has spent and expensed $1 million on R&D associated with the new project. C. The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year. D. Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost. E. The new project is expected to reduce sales of one of the company's existing products by 5%.arrow_forward
- Syndicate Ltd. is re-evaluating the rate of return demanded by its investors for new projects with the following projects being reviewed by the board for possible investment: Investment Investment Cost ($) Rate of Return (%) A 1,500,000 15 B 2,000,000 12 C 5,000,000 9 D 750,000 6 The latest balance sheet for Syndicate Ltd shows: Long Term Debt Book Value ($) Bonds: Issued at par: $100 5,000,000 Annual coupon of 6% 4 years to maturity Equity Preference Shares: 1,000,000 100,000 shares issued Ordinary Shares: 4,000,000 1,000,000 shares issued The company’s bank has advised that…arrow_forwardFirst United Bank Inc. is evaluating three capital investment projects using the net present value method. Relevant data related to the projects are summarized as follows: BranchOfficeExpansion ComputerSystemUpgrade ATMKioskExpansion Amount to be invested $686,053 $516,654 $295,458 Annual net cash flows: Year 1 411,000 288,000 177,000 Year 2 382,000 259,000 122,000 Year 3 349,000 230,000 89,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 Required: 1. Assuming that the desired rate of return is 20%, prepare a net present value analysis for each project. Use the…arrow_forwardCalculating Costs of Issuing Debt Tennis Games, Inc., with the help of its investment bank recently issued $26.30 million of new debt. The offer price (and face value) on the debt was $5,000 per bond and the underwriter's spread was 7 percent of the gross proceeds. What is the amount of capital funding Tennis Games, Inc. raised through this debt offering?arrow_forward
- (Capital structure analysis) The liabilities and owners' equity for Campbell Industries is found here: LOADING... . a. What percentage of the firm's assets does the firm finance using debt (liabilities)? b. If Campbell were to purchase a new warehouse for $1.1 million and finance it entirely with long-term debt, what would be the firm's new debt ratio? Accounts payable $519,000 Notes payable $248,000 Current liabilities $767,000 Long-term debt $1,101,000 Common equity $4,647,000 Total liabilities and equity $6,515,000arrow_forwardSeduak has estimated the costs of debt and equity capital for various proportions of debt in its capital structure. % Debt After-tax cost of debt Cost of equity 0% - 13.0% 10 5.4% 13.3 20 5.4 13.8 30 5.8 14.4 40 6.3 15.2 50 7.0 16.0 60 8.2 17.0 Based on these estimates, determine Seduak’s optimal capital structurearrow_forwardQuestion A: Is the company likely to be successful if it approaches its bank FCIB for a loan to undertake a project at a cost of $2.5 million?arrow_forward
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- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTCentury 21 Accounting Multicolumn JournalAccountingISBN:9781337679503Author:GilbertsonPublisher:Cengage