What impact would newnbspcapitalnbspstructurenbsphave on

Reference no: EM13476940

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

a. What impact would the new capital structure have on the firm's net income, total dollar return to investors, and ROE?

b. Redo the analysis, but now assume that the debt financing would cost 15 percent.

c. 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 income, total dollar return to investors, ROE. What lesson about capital structure and risk does this illustration provide?

d. Repeat the analysis required for Part a, but now assume that Seattle Health Plans is a not-for-profit corporation and pays no taxes. Compare the results with those obtained in Part a.

Reference no: EM13476940

Questions Cloud

Determine the factors that the manager of a financial : question 1asuggest which factors have the most significant impact on a financial-service institutions decision

Morningside nursing home not-for-profit corporation its tax : morningside nursing home a not-for-profit corporationnbsp its tax exempt debt currently requires an interest rate of

If the company maintains a constant 34 percent growth rate : feeback corporation stock currently sells for 27 per share. the market requires a return of 10.8 percent on the firms

Lohn corporation is expected to pay the given dividends : lohn corporation is expected to pay the following dividends over the next four years 19 15 14 and 5.50. afterward the

What impact would newnbspcapitalnbspstructurenbsphave on : seattle health plans currently uses zero-debt financing. its operating income ebit is 1 million and it pays taxes at a

The company will pay a 11 per share dividend in 10 years : metallica bearings inc. is a young start-up company. no dividends will be paid on the stock over the next nine years

What factors will the venture capital organization andor : you have just invented a new product that you believe will make you a millionaire in canada.nbsp however you do not

If it is the companys policy to always maintain a constant : suppose you know that a companys stock currently sells for 54 per share and the required return on the stock is 9

Keenan corporation is expected to maintain a constant 66 : keenan co. is expected to maintain a constant 6.6 percent growth rate in its dividends indefinitely. if the company has

User Account

All Pages