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Week 5 problem Set-Owens enterprises is in the process of determining its capital budget for the next fiscal yea




Week 5 problem Set;1. Owens enterprises is in the process of determining its capital budget for the next fiscal year. The firm?s current capital structure, which it considers to be optimal, is contained in the following balance sheet.;Balance sheet;Current assets: 40,000 Accounts payable: 20,000,000;Fixed assets: 400,000,000 other current Liabilities: 10,000,000;Total assets: 440,000,000 Long-Term debt, 123,000,000;Common stock at par: 15,500,000;Paid in capital in exes of par: 51,000,000;Retained earnings: 220,500,000;Total liabilities and;stockholders? equity: 440,000,000;Through discussions with the firm?s investment bankers, lead bank, and financial officers, the following information has been obtained;? The firm expects net income from this year to total $80 million. The firms intends to maintain its dividend policy of paying 42.5 percent of earnings to stockholders.;? The firm can borrow 18 million from its bank at a 13 percent annual rate.;? Any additional debt can be obtained through the issuance of debentures (at par) that carry a 15 percent coupon rate.;? The firm currently pays $4.40 per share in dividends. Dividends have grown at a 5 percent rate in the past. This growth is expected to continue.;? The firm?s common stock currently trades at $44 per share. If the firm were to raise any external equity, the newly issued shares would net the company $40 per share.;? The firm is in the 40 percent marginal tax bracket.;Compute Owens? marginal cost of capital schedule.;2. Jersey Computer company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure;proportion of after-tax of Cost of equity;debt debt, ki Ke;0.00 _________ 12.0%;0.10 4.7% 12.1;0.20 4.9 12.5;0.30 5.1 13.0;0.40 5.5 13.9;0.50 6.1 15.0;0.60 7.5 17.0;a. Determine the firm?s optimal capital structure, assuring a marginal income tax rate (T) of 40 percent.;b. Suppose that the firm?s current capital structure consists of 30 percent debt (and 70 percent equity). How much higher is its weighted cost of capital than at the optimal structure?;3. High sky, Inc., a hot air balloon manufacturing firm, currently has the following simplified balance sheet;Assets Liabilities and capital;Totasl assets 1,100,000 Bonds (10% interest) 600,000;Common stock at par ($3), 100,000 shares;Outstanding 300,000;Contributed capital in excess of par 100,000;Retained earnings 100,000;Total liabilities and capital 1,100,000;The company is planning an expansion that is expected to cost $600,000. The expansion can be financed with new equity (sold to net the company $4 per share) or with the sale of new bonds at an interest rate of 11%. (The firm?s marginal tax rate is 40%.);a. Compute the indifference point between the two financing alternatives.;b. If the expected level of EBIT for the firm is $240,000 with standard deviation of 50,000, what is the probability that the debt financing alternative will produce higher earnings than the equity alternative. (EBIT is normally distributed).;c.If the debt alternative is chosen, what is the probability that the company will have negative earnings per share in any period?


Paper#19010 | Written in 18-Jul-2015

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