Equity financing with debt financing, Corporate Finance

Seattle Health Plans currently uses zero debt financing.  Its operating income (EBIT) $1 million, and it pays taxes at a 40 percent rate.  It has $5 million in assests and because it is all equity financed $5 million in equity.  Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8 percent. 

  1. What impact would the new capital structure have on the firm's net income, total dollar return to investors, and ROE?
  2. Redo the analysis, but now assume the debt financing would cost 15 percent?
  3. Return to the initial 8 percent interest rate.  Now, assume that EBIT could be as low as $500,000 (with a probability of 20 percent) or as high as $1.5 million (with a probability of 20 percent).  There remains a 60 percent chance that EBIT would be $1 million.  Redo the analysis for each level of EBIT, and find the expected values for the firm's net income, total dollar return to investors, and ROE.  What lessons about capital structure and risk does this illustration provide?
  4. Repeat the analysis required for Part a, but now assume the Seattle Health Plans is a not-for-profit corporation and hence pays no taxes.  Compare the results with those obtained in Part a.

 

 

Posted Date: 2/28/2013 1:00:35 AM | Location : United States







Related Discussions:- Equity financing with debt financing, Assignment Help, Ask Question on Equity financing with debt financing, Get Answer, Expert's Help, Equity financing with debt financing Discussions

Write discussion on Equity financing with debt financing
Your posts are moderated
Related Questions
Assume that there are two firms, firm A and firm B. The firms have identical present values at £10,000 and an identical future value profile as given in the picture below. The prob

Calculate arithmetic returns and risk-premium of stocks. Describe the stock market behavior. Calculate expected return, variance and standard deviation for individual stocks and po

you have just been hired as a financial managher of a company that moulds bricks.the firm does not have a proper corporate governance structure.you ar to advice board of directors

Question: (a) In any year, the rate of interest on funds invested with a given insurance company is independent of the rates on interest in all previous years. Each year th

what is a co op society and its bye laws

How does cost of capital vary with debt-to-value ratio?

I have a Finance project due and I was wondering if I could get some help with it? Please advise. Thanks..

a) Cookie Monster Inc. (a $15 billion snack food company) is considering acquiring Keebler Elves but is unsure of how much is should be willing to pay for the target firm.  At the

Hello, What are the similarities and differences between project valuation and firm valuation. For example, using DCF model, by forecasting free cash flow, weighted average cost of

Continue with the Strategy of choice - Calculate the Net Present Value (NPV) - Determine the Internal Rate of Return (IRR) - Set Electrolux’s Required Rate of Return (RRR) E