Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
8th Edition
ISBN: 9781285065137
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 13, Problem 1DQ
To get an overall picture of each company’s capital structure, it is helpful to look at a chart that summarizes the company’s capital structure over the past decade. To obtain this chart, choose a company to start with and select FINANCIALS. Next, select MORE> THOMSON REPORTS & CHARTS>CAPITAL STRICTURE. This should generate a chart that plots the company’s total long-term debt, total common equity, and total current liabilities over the past decade. What, if any, are the major trends that emerge when you’re looking at these charts? Do these companies tend to have relatively high or relatively low levels of debt? Do these companies have significant levels of current liabilities? Have their capital structures changed over time?
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Kellogg’s CFO is in the process of determining the firm’s WACC and needs to figure out the weights of the various types of capital sources. Accordingly, she starts by collecting information from the balance sheet and the capital markets, and makes up the table shown below:
Component
Balance Sheet Value
Number Outstanding
Current Market Price
Market Value
Debt
$150,000,000
150,000
$1,075
Preferred Stock
$ 45,000,000
1,500,000
$40
Common Stock
$180,000,000
4,500,000
$45.57
Corporate tax rate = 30% is Tc
Before tax cost of debt = 7.6% Rd
Cost of Equity = 11.36% Re
Based upon the above information, calculate the firm’s weighted average cost of capital.
Compute the following ratios for both companies for the current year, and decide which company’s stock better fits your investment strategy.
Debt Ratio
Earning per share of common stocks
Price/earning ration
Dividend payout
The image attached below shows the Capital Structure of Petronas Sdn Bhd (Oil & Gas Company) from 2018 to 2022.
Answer the question :
Based on the image attached, analyze the trend of the Capital Structure (debt-equity ratio) of Petronas Sdn Bhd from Year 2018 to 2022. Then, explain / comment whether the analysis of Petronas' Capital Structure is relevant / relates to the concept of MM Propositions. (you can explain it based on the MM Proposition theory or apply the formula using Petronas' Capital Structure data).
(Please provide and cite reliable sources based on your research for the questions).
Chapter 13 Solutions
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
Ch. 13 - Changes in sales cause changes in profits. Would...Ch. 13 - Would each of the following increase, decrease, or...Ch. 13 - Discuss the following statement: All else equal,...Ch. 13 - Prob. 4QCh. 13 - Which of the following would likely encourage a...Ch. 13 - Prob. 6QCh. 13 - Why is EBIT generally considered independent of...Ch. 13 - Is the debt level that maximizes a firm's expected...Ch. 13 - If a firm goes from zero debt to successively...Ch. 13 - Prob. 10Q
Ch. 13 - Prob. 11QCh. 13 - Prob. 1PCh. 13 - OPTIMAL CAPITAL STRUCTURE Jackson. Trucking...Ch. 13 - RISK ANALYSIS a. Given the following information,...Ch. 13 - UNLEVERED BETA Harley Motors has 10 million in...Ch. 13 - FINANCIAL LEVERAGE EFFECTS Firms HL and LL are...Ch. 13 - BREAK-EVEN ANALYSIS The Weaver Watch Company sells...Ch. 13 - FINANCIAL LEVERAGE EFFECTS The Neal Company wants...Ch. 13 - HAMADA EQUATION Cyclone Software Co. is trying to...Ch. 13 - RECAPITALIZATION Tapley Inc. currently has total...Ch. 13 - BREAKEVEN AND OPERATING LEVERAGE a. Given the...Ch. 13 - RECAPITALIZATION Currently, Bloom Flowers Inc. has...Ch. 13 - BREAKEVEN AND LEVERAGE Wingler Communications...Ch. 13 - Prob. 13PCh. 13 - WACC AND OPTIMAL CAPITAL STRUCTURE Elliott...Ch. 13 - CAMPUS DELI INC. OPTIMAL CAPITAL STRUCTURE Assume...Ch. 13 - To get an overall picture of each companys capital...
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- To get an overall picture of each company's capital structure, it is helpful to look at a the Key Ratios screen and then select the Financial Health tab. Common size balance sheet data are provided over a 10-year period. What, if any, are the major trends that emerge when you're looking at those data? Do those companies tend to have relatively high or relatively low levels of debt? Do these companies have significant levels of current liabilities? Have their capital structures changed over time? Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. This chapter provides an overview of the effects of leverage and describes the process that firms use to determine their optimal capital structure. The chapter also indicates that capital structures tend to vary across industries and across countries. If you are interested in exploring these differences in more detail, the Morningstar website provides information about the capital structures of each of the companies it follows. The following discussion questions demonstrate how we can use this information to evaluate the capital structures for four restaurant companies: Cheesecake Factory (CAKE), Chipotle Mexican Grill (CMG), Ruby Tuesday (RT), and O'Charley's Inc. (CHUX).arrow_forwardAs a first step, we need to estimate what percentage of MMMs capital comes from debt, preferred stock, and common equity. This information can be found on the firms latest annual balance sheet. (As of year end 2014, MMM had no preferred stock.) Total debt includes all interest-bearing debt and is the sum of short-term debt and long-term debt. a. Recall that the weights used in the WACC are based on the companys target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM? b. Find MMMs market capitalization, which is the market value of its common equity. Using the sum of its short-term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firms debt and common equity weights to be used in the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation.arrow_forwardThe income statement comparison for Rush Delivery Company shows the income statement for the current and prior year. A. Determine the operating income (loss) (dollars) for each year. B. Determine the operating income (percentage) for each year. C. The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the total assets amounts as the investment base, calculate the ROI. Was the decision to invest additional assets in the company successful? Explain. D. Assuming an 8% cost of capital, calculate the RI for each year. Explain how this compares to your findings in part C.arrow_forward
- Analyze and compare Zynga, Electronic Arts, and Take-Two Data (in millions) from recent financial statements of Zynga Inc. (ZNGA), Electronic Arts Inc. (EA), and Take-Two Interactive Software, Inc. (TTWO) are as follows: a. Compute the working capital for Year 2 and Year 1 for each company. b. Which company has the largest working capital? c. Compute the current ratio for Year 2 and Year 1 for each company. Round to one decimal place. d. For Year 2, rank the companies from most liquid to least liquid based upon the current ratio.arrow_forwardMike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the companys financial statements for the 2 most recent years. Required: Note: Round all answers to two decimal places. 1. Compute the following for each year: (a) return on assets, (b) return on stockholders equity, (c) earnings per share, (d) price-earnings ratio, (e) dividend yield, and (f ) dividend payout ratio. 2. CONCEPTUAL CONNECTION Based on the analysis in Requirement 1, would you invest in the common stock of Kepler?arrow_forwardBased on the Massy Group, an investment holding company, answer the following questions below using the following link below for help. Provide a detail explanation and examples to the answers. https://massygroup.com/wp-content/uploads/2022/11/MASSY-DIGITAL-ANNUAL-REPORT-2022-updated.pdf Assess the company’s working capital position by analyzing its current assets and liabilities using common methods and measures. Evaluate the efficiency of the company’s working capital management strategies, including inventory management, accounts receivable, and accounts payable. Based on the assessment and evaluation above, provide ten recommendations for improving the company’s working capital management practices.arrow_forward
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Working capital explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=XvHAlui-Bno;License: Standard Youtube License