Problem-optimal capital structure

Assignment Help Business Management
Reference no: EM132803304

Problem 1: Optimal Capital Structure

XYZ Inc. is setting its target capital structure. The CFO of XYZ Inc. believes that the optimal debt-to-capital ratio is between 25 percent and 60 percent. Her staff derived following the projections. Various debt levels were considered.

Debt/Capital Ratio Projected EPS Projected Stock Price

25% $4.20 $40.00

35% $4.45 $41.50

45% $4.75 $41.25

60% $4.50 $40.59

Assuming that the firm uses only debt and common equity, what is XYZ's optimal capital structure? At what debt-to-capital ratio is the company's WACC minimized?

Problem 2: Break-Even Analysis

XYZ Inc. sells photo frames for $20 each. The fixed costs are $60,000, and variable costs are $7 per photo frame.

  1. What is the firm's gain or loss at sales of 6,000 photo frames? At 15,000 photo frames?
  2. How would the break-even point be affected if the selling price was raised to $25? How is this analysis significant?
  3. If the selling price was raised to $25 but variable costs rose to $13 a unit, what would happen to the break-even point?

Problem 3: WACC and Optimal Capital Structure

This problem is easiest to complete in Excel. Structure consists of only debt and common equity. XYZ's finance department staff created the following table showing the firm's debt cost at different debt levels:

Debt-to-Capital Ratio Equity-to-Capital Ratio Debt-to-Equity Ratio Bond Rating Before Tax Cost of Debt

0.00 1.0 0.00 A 6.0%

0.2 0.8 0.25 BBB 7.0%

0.4 0.6 0.67 BB 9.0%

0.6 0.4 1.50 C 11.0%

0.8 0.2 4.0 D 14.0%

XYZ uses the CAPM to estimate its cost of common equity and estimates that the risk-free rate is 4 percent, the market risk premium is 7 percent, and its tax rate is 35 percent. XYZ estimates that if it had no debt, its "unlevered" beta would be 1.5.

  1. What would be its WACC at the optimal capital structure? What would the firm's optimal capital structure be?
  2. If XYZ's managers anticipate that the company's business risk will increase in the future, what effect would this likely have on the firm's target capital structure?
  3. If Congress were to dramatically increase the corporate tax rate, what effect would this likely have on XYZ's target capital structure?

Problem 4: Cost of Trade Credit and Bank Loan

XYZ Inc. buys $10 million of materials (net of discounts) on terms of 3/5, net 60, and it currently pays on the 5th day and takes discounts. XYZ plans to expand, which will mean additional financing. Please show the calculations/work

  1. If XYZ decides to forgo discounts, could it obtain much additional credit?
  2. What would be the nominal and effective cost of that credit?
  3. What would be the effective cost of the bank loan if the company could get the funds from a bank at a rate of 8 percent and if the interest was paid monthly? All of this should be based on a 365-day year.
  4. Should XYZ use bank debt or additional trade credit? Explain.

Reference no: EM132803304

Questions Cloud

Advantages and disadvantages of a sole proprietorship : Please identify several .advantages and disadvantages of a sole proprietorship
Tax balance-due date for a public corporation : What is the tax balance-due date for a public corporation having a April 30, 2021 taxation year-end?
What is the total pv of contract offer : -What is the total PV of each contract offer assuming the most likely discount rate of 5.5%? What if the rate is 3.0%? Or 8.0%?
Calculate the cash flows from investing activities : SoTL, Inc. Balance Sheet For the Years Ending December 31, 2019 and 2020 (All figures in dollars) 41. Calculate the Cash flows from operating activities
Problem-optimal capital structure : XYZ Inc. is setting its target capital structure. The CFO of XYZ Inc. believes that the optimal debt-to-capital ratio is between 25 percent and 60 percent. Her
Compare different alternatives based on present worth : Compare different alternatives based on present worth (PW), annual worth (AW), and future worth (FW) criterions, and explain your decision accordingly
What is the present value of commitment : What is the present value of this commitment? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)
Importance of financial planning for a business : Do you think you can also use the some of the principles of financial planning in your daily lives? Explain your answer.
Calculate the npv of the investment : Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $46,000. The object is to save on horse transporter rentals.

Reviews

Write a Review

Business Management Questions & Answers

  Caselet on michael porter’s value chain management

The assignment in management is a two part assignment dealing 1.Theory of function of management. 2. Operations and Controlling.

  Mountain man brewing company

Mountain Man Brewing, a family owned business where Chris Prangel, the son of the president joins. Due to increase in the preference for light beer drinkers, Chris Prangel wants to introduce light beer version in Mountain Man. An analysis into the la..

  Mountain man brewing company

Mountain Man Brewing, a family owned business where Chris Prangel, the son of the president joins. An analysis into the launch of Mountain Man Light over the present Mountain Man Lager.

  Analysis of the case using the doing ethics technique

Analysis of the case using the Doing Ethics Technique (DET). Analysis of the ethical issue(s) from the perspective of an ICT professional, using the ACS Code of  Conduct and properly relating clauses from the ACS Code of Conduct to the ethical issue.

  Affiliations and partnerships

Affiliations and partnerships are frequently used to reach a larger local audience? Which options stand to avail for the Hotel manager and what problems do these pose.

  Innovation-friendly regulations

What influence (if any) can organizations exercise to encourage ‘innovation-friendly' regulations?

  Effect of regional and corporate cultural issues

Present your findings as a group powerpoint with an audio file. In addition individually write up your own conclusions as to the effects of regional cultural issues on the corporate organisational culture of this multinational company as it conducts ..

  Structure of business plan

This assignment shows a structure of business plan. The task is to write a business plane about a Diet Shop.

  Identify the purposes of different types of organisations

Identify the purposes of different types of organisations.

  Entrepreneur case study for analysis

Entrepreneur Case Study for Analysis. Analyze Robin Wolaner's suitability to be an entrepreneur

  Forecasting and business analysis

This problem requires you to apply your cross-sectional analysis skills to a real cross-sectional data set with the goal of answering a specific research question.

  Educational instructional leadership

Prepare a major handout on the key principles of instructional leadership

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd