2. Tiffany’s second concern:
a. What is the potential impact of increasing amounts of debt
financing on the firm’s stock price and CCC. Graph the stock price
and CCC at different levels of debt and interpret the relationships
among them.
b. Based on your results so far, what is the optimal capital
structure?
| EBIT | $ 12,000,000 | |
| No. of shares | 10,000,000 | |
| Debt Amount | Cost of Debt | Cost of Equity |
| $0 | 0.0% | 15.0% |
| $ 2,500,000 | 10.0% | 15.5% |
| $ 5,000,000 | 11.0% | 16.5% |
| $ 7,500,000 | 13.0% | 18.0% |
| $ 10,000,000 | 16.0% | 20.0% |
| $ 12,500,000 | 20.0% | 25.0% |
| Debt Amount | Stock Price | CCC |
| $0 | $4.800 | 15.0% |
| 2,500,000 | $4.798 | 15.0% |
| 5,000,000 | $4.664 | 15.4% |
| 7,500,000 | $4.425 | 16.3% |
| 10,000,000 | $4.120 | 17.5% |
| 12,500,000 | $3.530 | 20.4% |
| DEBT AMOUNT | COST OF DEBT | INTEREST | EBIT | EBT | COST OF EQUITY | MARKET VALUE OF EQUITY | NUMBER OF SHARES | STOCK PRICE | OPTIMAL CAPITAL STRUCTURE |
| - | 0.00% | - | 1,20,00,000.00 | 1,20,00,000.00 | 15.00% | 8,00,00,000.00 | 1,00,00,000.00 | $ 8.00 | 8,00,00,000.00 |
| 25,00,000.00 | 10.00% | 2,50,000.00 | 1,20,00,000.00 | 1,17,50,000.00 | 15.50% | 7,58,06,451.61 | 1,00,00,000.00 | $ 7.58 | 7,83,06,451.61 |
| 50,00,000.00 | 11.00% | 5,50,000.00 | 1,20,00,000.00 | 1,14,50,000.00 | 16.50% | 6,93,93,939.39 | 1,00,00,000.00 | $ 6.94 | 7,43,93,939.39 |
| 75,00,000.00 | 13.00% | 9,75,000.00 | 1,20,00,000.00 | 1,10,25,000.00 | 18.00% | 6,12,50,000.00 | 1,00,00,000.00 | $ 6.13 | 6,87,50,000.00 |
| 1,00,00,000.00 | 16.00% | 16,00,000.00 | 1,20,00,000.00 | 1,04,00,000.00 | 20.00% | 5,20,00,000.00 | 1,00,00,000.00 | $ 5.20 | 6,20,00,000.00 |
| 1,25,00,000.00 | 20.00% | 25,00,000.00 | 1,20,00,000.00 | 95,00,000.00 | 25.00% | 3,80,00,000.00 | 1,00,00,000.00 | $ 3.80 | 5,05,00,000.00 |
| Relationship | |||||||||
| Due to Increase in the Debt amount, Value of Euity has been Decline. | |||||||||
| Incresing amount of debt does not effect on the number of shares, already issued. | |||||||||
| Per share Value will be decline, due to increasing in the debt amount. | |||||||||
| Increasing in the rate of return of equity, will also decline the value of equity and per share value. | |||||||||
| DEBT AMOUNT | STOCK PRICE | NUMBER OF SHARES | VALUE OF SHARES | TOTAL VALUE OF BUSINESS | CCC | RETURN | |||
| - | $ 4.80 | 1,00,00,000.00 | 4,80,00,000.00 | 4,80,00,000.00 | 15.00% | 72,00,000.00 | |||
| 25,00,000.00 | $ 4.80 | 1,00,00,000.00 | 4,79,80,000.00 | 5,04,80,000.00 | 15.00% | 75,72,000.00 | |||
| 50,00,000.00 | $ 4.66 | 1,00,00,000.00 | 4,66,40,000.00 | 5,16,40,000.00 | 15.40% | 79,52,560.00 | |||
| 75,00,000.00 | $ 4.43 | 1,00,00,000.00 | 4,42,50,000.00 | 5,17,50,000.00 | 16.30% | 84,35,250.00 | |||
| 1,00,00,000.00 | $ 4.12 | 1,00,00,000.00 | 4,12,00,000.00 | 5,12,00,000.00 | 17.50% | 89,60,000.00 | |||
| 1,25,00,000.00 | $ 3.53 | 1,00,00,000.00 | 3,53,00,000.00 | 4,78,00,000.00 | 20.40% | 97,51,200.00 | |||
2. Tiffany’s second concern: a. What is the potential impact of increasing amounts of debt financing...