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




Question;Week 5 problem Set1. 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#52014 | Written in 18-Jul-2015

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