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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- Which 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 $1.5 million per year. D. Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost. E. The new project is expected to reduce sales of one of the company's existing products by 5%.arrow_forwardSyndicate Ltd. is re-evaluating the rate of return demanded by its investors for new projects with the following projects being reviewed by the board for possible investment: Investment Investment Cost ($) 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: $100 5,000,000 Annual coupon of 6% 4 years to maturity Equity Preference Shares: 1,000,000 100,000 shares issued Ordinary Shares: 4,000,000 1,000,000 shares issued The company’s bank has advised that…arrow_forward1. From the following information determine the appropriate WACC relevant for evaluating L-T Investment projects of the company: Cost of Equity AT Cost of L-T debt AT cost of S-T debt Source of Capital Equity L-T debt S-T debt 14% Book value Rs. 6,00,000 4,00,000 1,00,000 8% 5% Market Value Rs. 7,25,000 4,50,000 1,00,000arrow_forward
- Syndicate Ltd. is re-evaluating the rate of return demanded by its investors for new projects with the following projects being reviewed by the board for possible investment: Investment Investment Cost ($) 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_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_forward
- Seduak 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_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
- MIGHTY Corp obtained a 18 % , P 500,000, one year loan from KING Financing . Income tax is 32 %. Said amount was to finance a project with an expected return on investment of 20 % .a) Compute for the cost of borrowed capital. b) Is the use of borrowed capital advisable ? Why ?arrow_forwardA financial analyst is in the process of estimating the cost of capital of Gewicht GmbH. The following informnation is obtained from the company web pages. Market value of debt: $50 million • Market value of equity: $600 million Table 1. Primary competitors and capital structures (in millions) Market value of Market value of Competitor debt equity A $25 $50 B $101 $190 C $40 $60 QUESTIONS: What are Gewicht GmbH target capital structure (DV and E/V) if the analyst uses current capital structure? und numberto four decimalpla to report the results Options: 0.4213 0.4921 0,4545 0,5454 D/V v ENarrow_forwardNet Present Value Method, Present Value Index, and Analysis First 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 $863,421 $519,486 $311,214 Annual net cash flows: Year 1 358,000 243,000 165,000 Year 2 333,000 219,000 114,000 Year 3 304,000 194,000 83,000 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 6%,…arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTCentury 21 Accounting Multicolumn JournalAccountingISBN:9781337679503Author:GilbertsonPublisher:Cengage