You manage a new sports apparel company that is starting operations in perfect capital markets. Would...
You manage a new sports apparel company that is starting operations in perfect capital markets. Would you finance your operations with all debt or all stock? Please explain. Now consider functioning in the real world with 6% loan interest. Would you finance your operations with all debt or all stock? Please explain.
Homework Answers
Answer :- I would finance my operations with both the type of securities i.e., ownership (stock) and creditorship (debt) as the same will lead to balanced leverage. As the rate of interest on loan is quite low (6%), accordingly some operations to be financed with debt (loan) whereas the some operations to be financed with stock since the rate of capitalisation is higher. Capital mix should always be in such a way as to entail the minimum cost of issue of securities and cost of financing etc.
Add Answer to:
You manage a new sports apparel company that is starting
operations in perfect capital markets. Would...
Hardmon Enterprises is currently an all-equity firm with an expected return of 15%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. (Assume perfect capital markets.) a. Suppose Hardmon borrows to th
Hardmon Enterprises is currently an all-equity firm with an expected return of 15%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. (Assume perfect capital markets.)a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will the expected return of equity be after this transaction?b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon's debt will...
Global Internet company is looking to expand their operations. They are evaluating their cost of capital...
Global Internet company is looking to expand their operations. They are evaluating their cost of capital based on various financing options. Investment bankers informed them that they can issue new debt in the form of bonds at a cost of 8%, and issue new preferred stocks for the price of $25 per share paying $2.5 dividends per share. Their common stock is currently selling for $20 per share and will pay a dividend of $1.5 per share next year. They...
Yerba Industries is an all-equity firm whose stock has a beta of 0.60 and an expected return of 20%. Suppose it issues new risk-free debt with a 6% yield and repurchase 5% of its stock. Assume perfect capital markets. a. What is the beta of Yerba st
Yerba Industries is an all-equity firm whose stock has a beta of 0.60 and an expected return of 20%. Suppose it issues new risk-free debt with a 6% yield and repurchase 5% of its stock. Assume perfect capital markets. a. What is the beta of Yerba stock after this transaction? b. What is the expected return of Yerba stock after this transaction?Suppose that prior to this transaction, Yerba expected earnings per share this coming year of $3.00, with a forward P/E ratio (that is, the share price...
The Home Depot wants to raise new capital to compete better with Lowe’s. You are the...
The Home Depot wants to raise new capital to compete better with Lowe’s. You are the finance manager for Home Depot and your CEO has asked you to calculate the weighted average cost of capital (WACC) for The Home Depot. You plan to use a mix of debt and equity as follows: 40% equity and 60% debt. The interest rate applicable to debt is 6%. The CAPM cost of equity is 3%. What would you tell your CEO is the...
We are in a world of no corporate taxes. Markets in finance and investments are efficient....
We are in a world of no corporate taxes. Markets in finance and investments are efficient. The risk-free rate of interest is 2% and the expected equity premium is 5%. In the competitive market for Waste Disposal Services, all company operate extremely efficiently. One such company is All Clean Disposals (ACD). Their gearing ratio is currently 50% and you can assume that their debt is riskless. Each year, in perpetuity. the firm generates operating income with the following probabilities. £100,000...
Interest rates, the cost of money, influence most all factors related to personal and corporate capital...
Interest rates, the cost of money, influence most all factors related to personal and corporate capital budgeting. The more obvious personal information for the cost of money is the rates associated with a mortgage or car loan. As a CFO you would “shop” interest rates to find the best rate for your financing needs. Would you, as the CFO, finance your projects as soon as possible if the cost of capital was expected to drop? Please explain. More importantly, where...
(Individual or component costs of capital) Your firm is considering a new investment proposal and would...
(Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12.1 percent that is paid semiannually. The bond is currently selling for a price of $1,123 and will mature in 10...
Gerrell Corp. is considering a new capital structure. The new Levered Plan would result in 12,000...
Gerrell Corp. is considering a new capital structure. The new Levered Plan would result in 12,000 shares of stock and $100,000 in debt. The interest rate on the debt is 6 percent. Compare this plans to the current all-equity plan assuming that EBIT will be $75,000. The all-equity plan has 15,000 shares of stock outstanding. Assuming that the corporate tax rate is 40 percent, what is the EPS for each of these plans? What is the breakeven EBIT? (Do not...
If the company were to recapitalize, debt would be issued, and the funds received would be...
If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. Bernie’s is in the 25 percent state-plus-federal corporate tax bracket, its unlevered beta is .98, the risk-free rate is 2.5 percent, and the market risk premium is 8.5 percent. The company’s EBIT was $300 million last year and is expected to grow at a rate of 3% per year forever. The firm is currently financed with all equity and it...
Respecfully--Please answer all if you are willing to help. This is over MM propositions anf optimal...
Respecfully--Please answer all if you are willing to help. This is
over MM propositions anf optimal capital structure theories
QUESTION 1 With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects the value of a firm. True False QUESTION 2 Under the assumptions of Modigliani and Miller, a firm's value does not depend on the fraction of its financing that it raises from debt holders vs. equity holders. True False QUESTION...
We are in a world of no corporate taxes. Markets in finance and investments are efficient. The risk-free rate of interest is 2% and the expected equity premium is 5%. In the competitive market for Waste Disposal Services, all company operate extremely efficiently. One such company is All Clean Disposals (ACD). Their gearing ratio is currently 50% and you can assume that their debt is riskless. Each year, in perpetuity. the firm generates operating income with the following probabilities. £100,000...
(Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12.1 percent that is paid semiannually. The bond is currently selling for a price of $1,123 and will mature in 10...
Respecfully--Please answer all if you are willing to help. This is
over MM propositions anf optimal capital structure theories
QUESTION 1 With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects the value of a firm. True False QUESTION 2 Under the assumptions of Modigliani and Miller, a firm's value does not depend on the fraction of its financing that it raises from debt holders vs. equity holders. True False QUESTION...
Most questions answered within 3 hours.
-
Kyle, a 95.0 kg football player, leaps straight up into the air
(with no horizontal velocity)...
asked 10 minutes ago -
Which of the following is a measure of profitability?
A.
Quick (acid-test) ratio
B.
Net sales...
asked 12 minutes ago -
Find the total pressure exerted by 2 grams of ethane and 3 grams
of CO2 contained...
asked 14 minutes ago -
A fireman standing on a 5.2 m high ladder operates a water hose
with a round...
asked 10 minutes ago -
A cream formulation is studied for accelerated stability study.
Creaming was observed when formulation was tested...
asked 13 minutes ago -
A 1,150 lumen light bulb is placed 37 cm in front of a mirrored
wall, whose...
asked 23 minutes ago -
Given that z is a standard normal random variable, compute the
following probabilities (to 4 decimals)....
asked 29 minutes ago -
You begin preparation of the calibration curve to measure
absorbance vs concentration of FeSCN2+. To do...
asked 47 minutes ago -
When you speak after breathing helium, in which the speed of
sound is much greater than...
asked 39 minutes ago -
3. Stock Valuation: You are the CEO of Under Armour, Inc. and
are thinking about how...
asked 44 minutes ago -
Choose a brand. Critique the brand in terms of its brand
positioning, brand identity and brand...
asked 46 minutes ago -
A vertical curve has grades G1 = 2.8% (downgrade) and
G2 = 2.2 (upgrade) Assume design...
asked 47 minutes ago