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

Financial management, Discuss the applicability of the operating cycle in p...

Discuss the applicability of the operating cycle in poultry (consider broilers)

Show that a price is not an equilibrium price for asset, 1. Suppose that th...

1. Suppose that the one-period rate is 4% and that the two-period rate is 6%. What sort of expectation for the one-period rate next period makes this situation an equilibrium? 2

Conditions of a will-executorship laws and accounts, Conditions of a will ...

Conditions of a will A written will is not valid unless it fulfills the following conditions. 1) The testator must sign the will; or he must affix his mark to the will (i.e. a

Consequences of adjudication-adjudication of debtor, Consequences of adjudi...

Consequences of adjudication The consequences of the making of the adjudication order are: 1. The order must be advertised in the gazette and a local paper; 2. The ownershi

Investment, compute the arithmetic mean rate of return and standard deviati...

compute the arithmetic mean rate of return and standard deviation of rates of return for the two series

Provide doubtful debt , provide 5% for doubtful debt what is the journal en...

provide 5% for doubtful debt what is the journal entry

Enumerate the characteristics of accounting information, Enumerate the char...

Enumerate the characteristics of accounting information Qualities, or characteristics, which have just been depicted would help us to decide whether accounting information is p

Sugar and Spice bakery, Perform a business size-up of Sugar and Spice Baker...

Perform a business size-up of Sugar and Spice Bakery. 2. Qualitatively analyze the opportunity of closing the storefront to cater events.

Determine the basis of the ultimate cost of the payment, Given information:...

Given information: Offered a $20 million commercial loan priced using a 3month LIBOR index+100bp. After some preliminary research, using a money center bank's swap trading desk

Show the calculations and journal entries to record, Company A subsequently...

Company A subsequently sells 60% of the voting interest in Company S for $900,000. The fair value of Company A's retained interest of 10% in the voting stock in Company S is $120,0

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