Assume the debt financing would cost 15 percent, Financial Accounting

Assignment Help:

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

d.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.


Related Discussions:- Assume the debt financing would cost 15 percent

Profit is not cash flow, Profit is not cash flow: Adequate cash is esse...

Profit is not cash flow: Adequate cash is essential to keep business running. Inadequate cash increases the risk of not being able to meet current obligations as and when the

Prepare three years of monthly cash budgets for company, 1. Prepare three y...

1. Prepare three years of monthly cash budgets, yearly income statements, and yearly balance sheets for the jewelry business Daisy & Company. General Information: 1. Th

Required: prepare journal entries for the above transactions, Sleek Ride, a...

Sleek Ride, a company providing limo services, has a December 31 year-end date. For Sleek Ride, the following transactions occurred during the ?rst 10 days of June: a. Purchased, o

Earn profit or incurred loss , Assure  you have just  started a Mobile sto...

Assure  you have just  started a Mobile store. You sell mobile sets and  currencies of Airtel, Vodaphone, Reliance and BSNL.  Take five transactions  and prepare a position stateme

Draw neat sketches showing formation width for bank, Q. Draw neat sketches ...

Q. Draw neat sketches showing recommended formation width for bank and cutting for concrete sleeper track on B.G. as per latest guidelines of the Railway Board for double line. Sid

Financial ratio assignment, Critical Thinking Exercise Instructions: select...

Critical Thinking Exercise Instructions: select a company , Wendy''s or McDonald''s . Perform a Google search, key in McDonalds or Wendys Key financial ratios. I suggest you use f

Prepare the journal entries, Prepare the journal entries required to record...

Prepare the journal entries required to record the following transactions of a nongovernment, not-for-profit organization.   1. Unrestricted cash contributions received durin

Prepare general journal entries, Assessment Criteria: Student work will ...

Assessment Criteria: Student work will generally be assessed in terms of the following criteria: 1. Preparation of correct journal entries. 2. Accumulation of journal entr

Bond Valuation, FV of Bond 20000, CR 0.045, MR 0.059, Remaining payments 32...

FV of Bond 20000, CR 0.045, MR 0.059, Remaining payments 32. Answer

Write Your Message!

Captcha
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