The initial value of debt. Introduction: The debt–equity ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. This ratio is calculated by dividing company’s total liabilities by its shareholders’ equity; it is used to measure company’s financial leverage.

Question

Want to see the full answer?

Answer 1

Question

Chapter 18, Problem 4P

a)

Summary Introduction

To determine: The initial value of debt.

Introduction:

The debt–equity ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. This ratio is calculated by dividing company’s total liabilities by its shareholders’ equity; it is used to measure company’s financial leverage.

b)

Summary Introduction

To determine: The percentage change in the amount of the firm, its debt, and equity once the level of snowfall is revealed, but before adjusting the debt level.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

c)

Summary Introduction

To determine: The percentage change in the value of outstanding debt, once the debt equity is adjusted.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

d)

Summary Introduction

To determine: The reason for the riskiness of the firm’s tax shield.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the company's profits are driven by the amount of work Tom does. If he works 50 hours each week, the company's EBIT will be $645,000 per year; if he works a 60-hour week, the company's EBIT will be $815,000 per year. The company is currently worth $4.15 million. The company needs a cash infusion of $2.25 million and can issue equity or issue debt with an interest rate of 9 percent. Assume there are no corporate taxes. a. What are the cash flows to Tom under each scenario? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. Under which form of financing is Tom likely to work harder?

The company’s EBIT was $150 million last year and is not expected to grow. The firm is currently financed with all equity, and it has 20 million shares outstanding. When you took your corporate finance course, your instructor stated that most firm’s owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures: % Financed With Debt rd 0% --- 20 9.0% 30 9.5 40 11.0 55 13.0 If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. Gary’s Guacamole is in the 25 percent state-plus-federal corporate tax bracket, its beta is 1.35 the risk-free rate is 5 percent, and the market risk premium is 8.5…

You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $7 million. The product will generate free cash flow of $0.76 million the first year, and this free cash flow is expected to grow at a rate of 6% per year. Markum has an equity cost of capital of 10.9%, a debt cost of capital of 5.35%, and a tax rate of 42%. Markum maintains a debt-equity ratio of 0.40. What is the NPV of the new product line (including any tax shields from leverage)? (Round to two decimalplaces.) How much debt will Markum initially take on as a result of launching this product line? (Round to two decimalplaces.) How much of the product line's value is attributable to the present value of interest tax shields? (Round to two decimalplaces.)

Answer 2

Question

Chapter 18, Problem 4P

a)

Summary Introduction

To determine: The initial value of debt.

Introduction:

The debt–equity ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. This ratio is calculated by dividing company’s total liabilities by its shareholders’ equity; it is used to measure company’s financial leverage.

b)

Summary Introduction

To determine: The percentage change in the amount of the firm, its debt, and equity once the level of snowfall is revealed, but before adjusting the debt level.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

c)

Summary Introduction

To determine: The percentage change in the value of outstanding debt, once the debt equity is adjusted.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

d)

Summary Introduction

To determine: The reason for the riskiness of the firm’s tax shield.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 3

Question

Chapter 18, Problem 4P

a)

Summary Introduction

To determine: The initial value of debt.

Introduction:

The debt–equity ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. This ratio is calculated by dividing company’s total liabilities by its shareholders’ equity; it is used to measure company’s financial leverage.

b)

Summary Introduction

To determine: The percentage change in the amount of the firm, its debt, and equity once the level of snowfall is revealed, but before adjusting the debt level.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

c)

Summary Introduction

To determine: The percentage change in the value of outstanding debt, once the debt equity is adjusted.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

d)

Summary Introduction

To determine: The reason for the riskiness of the firm’s tax shield.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 4

Question

Chapter 18, Problem 4P

a)

Summary Introduction

To determine: The initial value of debt.

Introduction:

The debt–equity ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. This ratio is calculated by dividing company’s total liabilities by its shareholders’ equity; it is used to measure company’s financial leverage.

b)

Summary Introduction

To determine: The percentage change in the amount of the firm, its debt, and equity once the level of snowfall is revealed, but before adjusting the debt level.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

c)

Summary Introduction

To determine: The percentage change in the value of outstanding debt, once the debt equity is adjusted.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

d)

Summary Introduction

To determine: The reason for the riskiness of the firm’s tax shield.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 5

Chapter 18, Problem 4P

a)

Summary Introduction

To determine: The initial value of debt.

Introduction:

The debt–equity ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. This ratio is calculated by dividing company’s total liabilities by its shareholders’ equity; it is used to measure company’s financial leverage.

b)

Summary Introduction

To determine: The percentage change in the amount of the firm, its debt, and equity once the level of snowfall is revealed, but before adjusting the debt level.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

c)

Summary Introduction

To determine: The percentage change in the value of outstanding debt, once the debt equity is adjusted.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

d)

Summary Introduction

To determine: The reason for the riskiness of the firm’s tax shield.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Answer 6

Chapter 18, Problem 4P

a)

Summary Introduction

To determine: The initial value of debt.

Introduction:

The debt–equity ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. This ratio is calculated by dividing company’s total liabilities by its shareholders’ equity; it is used to measure company’s financial leverage.

Answer 7

Chapter 18, Problem 4P

a)

Summary Introduction

To determine: The initial value of debt.

Introduction:

The debt–equity ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. This ratio is calculated by dividing company’s total liabilities by its shareholders’ equity; it is used to measure company’s financial leverage.

Answer 8

b)

Summary Introduction

To determine: The percentage change in the amount of the firm, its debt, and equity once the level of snowfall is revealed, but before adjusting the debt level.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Answer 9

b)

Summary Introduction

To determine: The percentage change in the amount of the firm, its debt, and equity once the level of snowfall is revealed, but before adjusting the debt level.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Answer 10

c)

Summary Introduction

To determine: The percentage change in the value of outstanding debt, once the debt equity is adjusted.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Answer 11

c)

Summary Introduction

To determine: The percentage change in the value of outstanding debt, once the debt equity is adjusted.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Answer 12

d)

Summary Introduction

To determine: The reason for the riskiness of the firm’s tax shield.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Answer 13

d)

Summary Introduction

To determine: The reason for the riskiness of the firm’s tax shield.

Introduction:

The debt–equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Answer 14

Expert Solution & Answer

Answer 15

Expert Solution & Answer

Answer 16

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 17

Ch. 18.1 - What are the three methods we can use to include...Ch. 18.1 - Prob. 2CC Ch. 18.2 - Prob. 1CC Ch. 18.2 - Prob. 2CC Ch. 18.3 - Prob. 1CC Ch. 18.3 - Prob. 2CC Ch. 18.4 - Prob. 1CC Ch. 18.4 - Prob. 2CC Ch. 18.5 - How do we estimate a projects unlevered cost of...Ch. 18.5 - What is the incremental debt associated with a...

Solution Summary: The author explains how the debt–equity ratio determines how much debt a company is using to finance its assets relative to the value of shareholders' equity.

Videos

Want to see the full answer?

Chapter 18 Solutions