CFIN (with MindTap Finance, 1 term (6 months) Printed Access Card) (MindTap Course List)
6th Edition
ISBN: 9781337407342
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Chapter 12, Problem 8PROB
Summary Introduction
Optimal capital structure:
Optimal capital structure is capital structure at which market price of the firm is highest.
Calculate the optimal capital structure as follows:
Total capital amount is $50 million. Calculate the optimal capital structure.
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Hutchinson Corporation has zero debt - it is financed only with common equity. Its total assets are $400,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?
Select the correct answer.
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a. $160,000.00
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b. $160,011.80
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c. $159,988.20
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d. $159,964.60
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e. $159,976.40
Absolute Corporation currently has $60 million in liabilities and common equity in combination. The firm has no preferred stock. The CFO constructed the following table to show the CEO the effect of changing the firm's capital structure.
Amount of Debt
in the Capital
Structure
$18,000,000
24,000,000
30,000,000
According to this information, what is Absolute's optimal capital structure? Explain your answer. Round your answer to the nearest whole number.
The optimal capital structure contains
% of debt because it -Select-
-Select-
has the lowest amount of debt in the capital structure
provides the highest market price per share of stock
provides the highest earnings per share
Earnings per
Share (EPS)
$5.00
5.70
6.70
Market Price per
Share (Po)
$101.80
112.75
110.50
Appliances, Inc. has no debt outstanding, and its financial position is given by the following data:Â Â Â Â Â Â Â Â Â Â Â
Assets (market value = book value)
Â
$5,000,000
EBIT
Â
$800,000
Cost of equity
12%
Stock price
$10
Shares outstanding
Â
500,000
Tax rate
Â
25%
         Â
The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 20% debt based on market values, its cost of equity will increase to 13% to reflect the increased risk. Bonds can be sold at a cost of 6%. Appliance, Inc. is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.
As a creditor, you are concerned about the company’s ability to repay its debt and interest. What is the new times interest earned?
Chapter 12 Solutions
CFIN (with MindTap Finance, 1 term (6 months) Printed Access Card) (MindTap Course List)
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