CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
5th Edition
ISBN: 9781305661653
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
bartleby

Concept explainers

bartleby

Videos

Question
Chapter 12, Problem 1PROB
Summary Introduction

Capital Structure of any company is the mix of different levels of debt and equity. An optimal capital structure is the appropriate mix of debt and equity, striking a balance between risk and return to achieve the goal of maximizing the price of the firm’s stock. Therefore, a target proportion of capital structure and cost of each financing can be used to determine the WACC of the company.

Weighted Average Cost of Capital (WACC) is the required rate of return investors would expect from the company. If a company uses a combination of financing alternatives to fund its business, it should calculate an average cost of capital. Various long-term funds include debt, equity and preferred stock. Regardless of the mode of financing for a project, a company’s WACC should be considered in making capital budgeting decisions.

WACC=wd(rdT)+wps(rps)+ws(rsorre)

Here,

Proportion of debt in the target capital structure “wd

Proportion of preferred stock in the target capital structure “wps

Proportion of equity in the target capital structure “ws

After tax cost of debt, preferred stock, retained earnings and new equity is “rdT”,“rps”,“rs”and “re”, respectively.

EPS analysis at a given level of EBIT helps in determining the optimal capital structure of the firm, that is the structure at which the EPS will be the highest.

At a sale of $200,000 and debt to total asset ratio of 20%, the company has total assets $200,000, cost of debt 8.5% and number of shares outstanding 8,000.

Expert Solution & Answer
Check Mark

Explanation of Solution

Income statement of the company is prepared with a debt of $40,000 (20%*$200,000) and interest rate on the debt of 8.5%.

CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press), Chapter 12, Problem 1PROB

Therefore, when D/TA is 20% and sales is $200,000, the company’s EPS would be $2.15.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Under Armour has the following current assets: cash, $102 million; receivables, $94 million; inventory, $182 million; and other current assets, $18 million. Under Armour has the following liabilities: accounts payable, $98 million; current portion of long-term debt, $35 million; and long-term debt, $23 million.   Based on these amounts, calculate the current ratio and the acid-test ratio for Under Armour.
XYZ Company reported the following information: Total Assets $500,000, Total Liabilities $200,000, and Equity $300,000. Calculate the debt-to-equity ratio and the equity multiplier.
ABC has the following current assets: cash, $102 million; receivables, $94 million; inventory, $182 million; other current assets, $18 million. ABC also has the following liabilities: accounts payable, $98 million; long-term debt, $23 million. Based on these amounts, what is the acid-test ratio ?   Numeric Response:?????????
Knowledge Booster
Finance
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
    • SEE MORE QUESTIONS
    Recommended textbooks for you
  • EBK CFIN
    Finance
    ISBN:9781337671743
    Author:BESLEY
    Publisher:CENGAGE LEARNING - CONSIGNMENT
    Cornerstones of Financial Accounting
    Accounting
    ISBN:9781337690881
    Author:Jay Rich, Jeff Jones
    Publisher:Cengage Learning
    Financial Accounting
    Accounting
    ISBN:9781337272124
    Author:Carl Warren, James M. Reeve, Jonathan Duchac
    Publisher:Cengage Learning
  • Financial Accounting
    Accounting
    ISBN:9781305088436
    Author:Carl Warren, Jim Reeve, Jonathan Duchac
    Publisher:Cengage Learning
    Managerial Accounting: The Cornerstone of Busines...
    Accounting
    ISBN:9781337115773
    Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
    Publisher:Cengage Learning
    Survey of Accounting (Accounting I)
    Accounting
    ISBN:9781305961883
    Author:Carl Warren
    Publisher:Cengage Learning
  • EBK CFIN
    Finance
    ISBN:9781337671743
    Author:BESLEY
    Publisher:CENGAGE LEARNING - CONSIGNMENT
    Cornerstones of Financial Accounting
    Accounting
    ISBN:9781337690881
    Author:Jay Rich, Jeff Jones
    Publisher:Cengage Learning
    Financial Accounting
    Accounting
    ISBN:9781337272124
    Author:Carl Warren, James M. Reeve, Jonathan Duchac
    Publisher:Cengage Learning
    Financial Accounting
    Accounting
    ISBN:9781305088436
    Author:Carl Warren, Jim Reeve, Jonathan Duchac
    Publisher:Cengage Learning
    Managerial Accounting: The Cornerstone of Busines...
    Accounting
    ISBN:9781337115773
    Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
    Publisher:Cengage Learning
    Survey of Accounting (Accounting I)
    Accounting
    ISBN:9781305961883
    Author:Carl Warren
    Publisher:Cengage Learning
    Bond Valuation - A Quick Review; Author: Pat Obi;https://www.youtube.com/watch?v=xDWTPmqcWW4;License: Standard Youtube License