EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 12, Problem 16P
Summary Introduction
To determine: The minimum
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
LANY Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $2,400,000, its fixed assets turnover ratio equals 3.0, and its debt and common equity are each 50% of total assets which is composed of fixed and current assets. EBIT is $130,000, the interest rate on the firm's debt is 8%, and the tax rate is 30%. If the company follows a restricted policy, its total assets turnover will be 2.4. Under a relaxed policy its total assets turnover will be 2.0.
1.) How much would be the current assets under relaxed policy? Use 2 decimal places for your final answer
2.) Refer to the previous item, what is the projected ROE under the restricted policy? Use 2 decimal places for your final answer
3.) Refer to the previous item, what is the TIE ratio under the relaxed policy? Use 2 decimal places for your final answer
North Melbourne Holdings Ltd is a diversified industrial firm whose overall WACC is 11%. It is considering three independent projects, Projects A, B and C. Project A is in its textiles division, Project B is in its construction division and Project C is in its mining division. The expected returns from these projects are 7%, 8.9% and 12.4% respectively. The costs of capital for each division, based on the beta of firms in the respective industries, are 9.5%, 11.6% and 14.1% respectively. Which projects should the firm accept?
Managers from different departments in Bensen Systems, a large multinational corporation, have offered seven projects for consideration by the corporate office. A staff member for the chief financial officer used key words to identify the projects and then listed them in order of projected rate of return as shown below. If the company wants to grow rapidly through high leverage and uses only 5% equity financing that has a cost of equity capital of 10% and 95% debt financing with a cost of debt capital of 19%, which projects should the company undertake? Project ID Projected ROR, % per year Inventory 30.0 Technology 28.4 Warehouse 21.9 Maintenance 19.5 Products 13.1 Energy 9.6 Shipping 8.2
Chapter 12 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 12 - Prob. 1QTDCh. 12 - Prob. 2QTDCh. 12 - Prob. 3QTDCh. 12 - Prob. 4QTDCh. 12 - Prob. 5QTDCh. 12 - Prob. 6QTDCh. 12 - Prob. 7QTDCh. 12 - Prob. 8QTDCh. 12 - Prob. 9QTDCh. 12 - Prob. 10QTD
Ch. 12 - Prob. 11QTDCh. 12 - Prob. 12QTDCh. 12 - Prob. 13QTDCh. 12 - Prob. 1PCh. 12 - Prob. 2PCh. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Prob. 8PCh. 12 - Prob. 9PCh. 12 - Prob. 10PCh. 12 - Prob. 11PCh. 12 - Prob. 12PCh. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Prob. 18PCh. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Prob. 22PCh. 12 - Prob. 23PCh. 12 - Prob. 24PCh. 12 - Prob. 26P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $2,520,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.1. If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy? Do not round intermediate calculations. a. $19,200 b. $11,520 c. $9,600 d. $5,760 e. $4,800arrow_forwardBen Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $2,400,000, its fixed assets turnover ratio equals 3.0, and its debt and common equity are each 50% of total assets which is composed of fixed and current assets. EBIT is $130,000, the interest rate on the firm's debt is 8%, and the tax rate is 30%. If the company follows a restricted policy, its total assets turnover will be 2.4. Under a relaxed policy its total assets turnover will be 2.0. a. What is the projected ROE under the relaxed policy? b. TIE ratio under relaxed policyarrow_forwardEBS Plc, an all equity-financed firm, has three strategic business units. The polythene division has capital of £8m and is expected to produce annual returns of 11% for the next five years. Thereafter it will produce annual returns equal to the required rate of return for this risk level of 14%. The paper division has an investment level of £12m and a planning horizon of 10 years. During the planning horizon it will produce a return of 22% compared with a risk-adjusted required rate of return of 15%. The cottondivision uses £2m of capital, has a planning horizon of seven years and a required rate of return of 16% compared with the anticipated actual rate of 17% over the first seven years.I. Calculate the value of the firm.II. Draw a value-creation and performance spread chart.III. Discuss the advantages and disadvantages in using the Total Shareholder Return (TSR) and Wealth Added Index (WAI) to judge managerial performance.arrow_forward
- Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.9, 1.3, 1.4, and 1.5, respectively. Assume all current and future projects will be financed with 35 percent debt and 65 percent equity, the current cost of equity (based on an average firm beta of 1.3 and a current risk-free rate of 4 percent) is 15 percent and the after-tax yield on the company’s bonds is 9 percent. What will the WACCs be for each division? Note: Do not round intermediate calculations. Round your final answers to 2 decimal places.arrow_forwardLany Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm’s annual sales are expected to total 2,400,000 its fixed asset turnover ratio equals 3.0, and its debt and common equity are each 50% of the total asset which is composed of fixed and current assets. EBIT is 130,000, the interest rate of the firm’s debt is 8%, and the tax rate is 30%. If the company follows a restricted policy, its total asset turnover will be 2.4. Under a relaxed policy its total asset turnover will be 2.0. How much would be the current assets under relaxed policy? Refer to the previous item, what is the projected ROE under the restricted policy? Use 2 decimal places for your final answer Refer to the previous item, what is the TIE ratio under the related policy? Use 2 decimal places for your final answer.arrow_forwardLany Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm’s annual sales are expected to total 2,400,000 its fixed asset turnover ratio equals 3.0, and its debt and common equity are each 50% of the total asset which is composed of fixed and current assets. EBIT is 130,000, the interest rate of the firm’s debt is 8%, and the tax rate is 30%. If the company follows a restricted policy, its total asset turnover will be 2.4. Under a relaxed policy its total asset turnover will be 2.0. How much would be the current assets under relaxed policy?arrow_forward
- Travis & Sons has a capital structure that is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pretax cost of debt is 7.5 percent, the cost of preferred is 9.6 percent, and the cost of common stock is 13 percent. The tax rate is 21 percent. The company is considering a project that is as risky as the overall firm. This project has initial costs of $325,000 and annual cash inflows of $87,000, $279,000, and $116,000 over the next three years, respectively. What is the projected net present value of this project? $71,821.94 $76,011.23 $68,211.04 $74272.98arrow_forwardMarble Construction estimates that its WACC is 10% if equitycomes from retained earnings. However, if the company issues new stock to raise newequity, it estimates that its WACC will rise to 10.8%. The company believes that it willexhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following7 investment projects: Assume that each of these projects is independent and that each is just as risky as the firm’sexisting assets. Which set of projects should be accepted, and what is the firm’s optimalcapital budget?arrow_forwardA firm with a corporatewide debt-to-equity ratio of 1:2,an after-tax cost of debt of 7%, and a cost of equity capital of 15% is interested in pursuing a foreign project. Thedebt capacity of the project is the same as for the company as a whole, but its systematic risk is such that therequired return on equity is estimated to be about 12%.The after-tax cost of debt is expected to remain at 7%.What is the project’s weighted average cost of capital? Howdoes it compare with the parent’s WACC?arrow_forward
- Walther enterprises has a capital structure target of 60 percent common equity, 15 percent preferred stock, and 25 percent long-term debt. Walther’s financial analysts have estimated the marginal after tax cost of debt, preferred stock, and common equity to be 5 percent, 8.5 percent, and 11 percent, respectively. What is the weighted marginal cost of capital for Walther?arrow_forwardMedallion Cooling Systems, has total assets of $10,900,000, EBIT of $1,990,000, and preferred dividends of $205,000and is taxed at a rate of 40%.In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment: Capital structure debt ratio Cost of debt, rd Number of common stock shares Required return, rs 0% 0% 198,000 12.1% 15 7.9 171,000 13.2 30 8.9 141,000 13.8 45 12.1 107,000 16.1 60 14.9 76,000 20.1 a. Calculate earnings per share for each level of indebtedness. Debt Ratio 0% EBIT $ 1,990,000 Less: Interest $ EBT $ Taxes @40% $ Net profit $ Less: Preferreddividends $ Profits available to common stockholders $…arrow_forwardThe Beta Corporation has an optimal debt ratio of 40 percent. Its cost of equity capital is 10 percent, and its before-tax borrowing rate is 7 percent. Given a marginal tax rate of 35 percent. Required: A. Calculate the weighted-average cost of capital. B. Calculate the cost of equity for an equivalent all-equity financed firm.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY