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Mini Case question

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Question;MINI CASE;a. Using the free cash flow;valuation model, show the only avenues by which capital structure can affect;value.;b. (1) What;is business risk? What factors influence;a firm's business risk?;b. (2) what is;operating leverage, and how does it affect a firm's business risk? Show the operating break even point if a;company has fixed costs of $200, a sales price of $15, and variables costs of;$10.;c. Now, to develop an example which;can be presented to Pizza Palace?s management to illustrate the effects of;financial leverage, consider two hypothetical firms: firm U;which uses no debt financing, and firm L, which uses $10,000 of 12 percent;debt. Both firms have $20,000 in assets;a 40 percent tax rate, and an expected EBIT of $3,000.;1. Construct;partial income statements, which start with EBIT, for the two firms.. 2. Now;calculate roe for both firms.3. What does this example illustrate about the impact of;financial leverage on ROE?;d. Explain the difference between;financial risk and business risk.;f. What does capital structure;theory attempt to do? What lessons can;be learned from capital structure theory?;Be sure to address the MM models.;g. What does the empirical evidence;say about capital structure theory? What;are the implications for managers?

 

Paper#42054 | Written in 18-Jul-2015

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