9 The few\'s target capital structure should do which of the following? its-tanF
ID: 2796838 • Letter: 9
Question
9 The few's target capital structure should do which of the following? its-tanFoods has a capital structure of 40% debt and 60% equity, itstax rate is 35%, and d no debBased on the Hamada equation, what would the firm's beta be if thhchest ossible bond rating the weighted average cost of capital (WACC) unlevered beta, b.? ie, what is its a 0.71 b, 075 d 083 e o8z laptop computer. The issue now is how to finance the company, with only equity or w mix of debt and equity. Ex shown below. with a a for the firm are 21. You work for the CEO of a new company that plans to manufacture and sell a rn How much higher or lower will the firm's expected EPS be if it uses some det rather than only equity, ie, what is EPS- EPS. 60% Debt,L $600,000 0% Debt, U $600,000 $2,500,000 0.0% $0.00 $2,500,000 250,000 NA 35% Oper. income (EBIT) ired investment 60.0% $1,500,000 $1,000,000 100,000 1 0.00% 35% 5 of Debt 5 of Common equity Shares issued, $10/share Interest rate Tax rate a $1.00 c. $1.23 d. $1.37 e. My calculation is: $ 22. A firm that follows an aggressive working capital financing approach uses primarily short- term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus a. True follows a conservative financing policy. b. False The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the receivables collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. The shorter the CCC, the less effective the firm's working capital management. 23. a. True b. False 24. Other things held constant, which of the following will cause an increase in net working capital? a. Cash is used to buy marketable securities. b. A cash dividend is declared and paid. c. Merchandise is sold at a profit, but the sale is on credit. d. Long-term bonds are retired with the proceeds of a preferred stock issue. e. Missing inventory is written off against retained earningsExplanation / Answer
Question No 19 : The objective of the Firm's capital structure is to have optimum mix of Debt and Equity so as to minimize the Weigted Average Cost of Capital. Option e
Question 20 :
EI Capital Foods has capital structure with 40% debt and 60% equity.Tax rate is 35% and Leveraged Beta 1.25
If firm has No Debt then it's Equity Beta is known as unleavered Beta
Unleavered Beta = Leveraged Beta * [1/1+((1-tax rate)* Debt/Equity))]
= 1.25 * [1/1+(0.35*(0.4/0.6))]
= 1.25 *[1/1.2333}
= 1.0135
Question No 21
In this problem, we have to calculate EPS in both situations one with No debt in Capital Structure and other with Some portion of Debt in Capital Structure
case 1 : With 0% Debt, Calculate EPS
EBIT = $ 600,000
Interest on Debt = $0 as no Debt
Earnings Before Tax = $600,000
Tax Rate at 35% = $ 210,000
Earnings After Tax = $ 390,000
EPS = (Earnings After Tax/Total no of outstanding shares)
= 390,000/250,000 = $ 1.56
Case 2 : with 60% Debt in Capital Structure, calculate EPS
EBIT = $ 600,000
Interest of Debt of 1,500,000 at 10% = $150,000
Earnings After Interest = $450,000
Tax on Earnings at 35% = $ 157,500
Earnings After Tax = $292,500
EPS = Earnings After Tax/No of Shares Outstanding
= 292,500/100,000
= 2.925 =$ 2.93
Thus EPS with option 2 i.e. with some portion of Debt in Capital Structure is more than Case 1 with no Debt in Capital Structure.
Difference in EPS = 2.93-1.56 = $1.37
Answer is option D.
Question 22 :
Answer is True under the circumstances with given set of information. As in first case, firm is using short term finance to fund the working capital needs. Short Term Finance is subjected to more variation in terms of rate of interest and thus leads to lesser stability. In other case, using Long term finance to fund working capital needs enhances net working Capital of the firm and lowers dependence on short term finance. Long term finance is considered more stable.
Note : First 4 Sub parts are solved under this Question. For Question Number 23 and 24, Kindly raise a different question.
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