PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 28, Problem 27PS
Summary Introduction
To discuss: Whether Company G’s debt ratio is calculated in terms of total capitalization or total liabilities. Items to be included in debt and discuss the advantages and disadvantages.
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You have the following initial information on Financeur Co. on which to base your calculationsand discussion for questions 2):• Current long-term and target debt-equity ratio (D:E) = 1:3• Corporate tax rate (TC) = 30%• Expected Inflation = 1.55%• Equity beta (E) = 1.6325• Debt beta (D) = 0.203• Expected market premium (rM – rF) = 6.00%• Risk-free rate (rF) =2.05%2) Assume now a firm that is an existing customer of Financeur Co. is considering a buyoutof Financeur Co. to allow them to integrate production activities. The potential acquiringfirm’s management has approached an investment bank for advice. The bank believesthat the firm can gear Financeur Co. to a higher level, given that its existing managementhas been highly conservative in its use of debt. It also notes that the customer’s firm hasthe same cost of debt as that of Financeur Co. Thus, it has suggested use of a target debtequity ratio of 2:3 when undertaking valuation calculations.a) What would the required rate of return…
Ace Enterprises Limited is a large company involved in production and sale of petroleum products. The Finance Department of the company is trying to determine the company’s optimal capital structure. The firms’ financial advisors have developed the following table:Equity-Ratio Debt-Ratio Before Tax Cost of Debt (Kd)100% 0% 7.00%80% 20% 8.00%60% 40% 10%40% 60% 12%20% 80% 15%The company uses and applies the Capital Assets Pricing Model to estimate its cost of common equity. The company estimates that the risk free rate is 4.0%. The market risk premium is 6.0%, and its tax rate is 30 percent. The company estimates that if it had no debt, its unlevered beta would be 1.2. Required:A. Based on the above…
Ace Enterprises Limited is a large company involved in production and sale of petroleum products. The Finance Department of the company is trying to determine the company’s optimal capital structure. The firms’ financial advisors have developed the following table:
Equity Ratio
Debt Ratio
Before Tax Cost of Debt
100%
0%
7%
80%
20%
8%
60%
40%
10%
40%
60%
12%
20%
80%
15%
The company uses and applies the Capital Assets Pricing Model to estimate its cost of common equity. The company estimates that the risk free rate is 4.0%. The market risk premium is 6.0%, and its tax rate is 30 percent. The company estimates that if it had no debt, its unlevered beta would be 1.2.
Required:
A. Based on the above information, what is the firm’s optimal capital structure?
B. What would the weighted average cost of capital be at the optimal capital structure?
C. If a firm went from zero debt to successively higher levels of debt, why would you expect its stock price to first rise, then hit…
Chapter 28 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 28 - Prob. 1PSCh. 28 - Financial ratios Table 28.10 gives abbreviated...Ch. 28 - Performance measures Look again at Table 28.10. At...Ch. 28 - Prob. 5PSCh. 28 - Financial ratios True or false? a. A companys...Ch. 28 - Book rates of return Keller Cosmetics maintains an...Ch. 28 - Prob. 8PSCh. 28 - Prob. 9PSCh. 28 - Prob. 10PSCh. 28 - Prob. 11PS
Ch. 28 - Prob. 12PSCh. 28 - Prob. 13PSCh. 28 - Prob. 14PSCh. 28 - Performance measures Describe some alternative...Ch. 28 - Prob. 16PSCh. 28 - Prob. 17PSCh. 28 - Prob. 18PSCh. 28 - Financial ratios Sara Togas sells all its output...Ch. 28 - Prob. 20PSCh. 28 - Prob. 21PSCh. 28 - Prob. 22PSCh. 28 - Prob. 23PSCh. 28 - Prob. 25PSCh. 28 - Prob. 26PSCh. 28 - Prob. 27PS
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