Compare your findings in parts b and c, and comment on the effect of the reduction of debt to zero on the firm’s financial risk.
1. Tower Interiors has made the forecast of sales shown in the following table. Also given is the probability of each level of sales. The firm has fixed operating costs of $75,000 and variable operating costs equal to 70% of the sales level. The company pays $12,000 in interest per period. The tax rate […]
Discuss the leverage and risk aspects of each structure.
Data-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. a. Calculate two EBIT–EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values. b. Plot the two capital structures on a set of EBIT–EPS axes. c. Indicate […]
Calculate earnings per share for each level of indebtedness.
Medallion Cooling Systems, Inc., has total assets of $10,000,000, EBIT of $2,000,000, and preferred dividends of $200,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of […]
estimate the share value for each of the capital structures being considered.
Country Textiles, which has fixed operating costs of $300,000 and variable operating costs equal to 40% of sales, has made the following three sales estimates, with their probabilities noted. The firm wishes to analyze five possible capital structures: 0%, 15%, 30%, 45%, and 60% debt ratios. The firm’s total assets of $1 million […]
How much cash will be needed to pay the dividend?
1.“Information asymmetry lies at the heart of the ethical dilemma that managers, stockholders, and bondholders confront when companies initiate management buyouts or swap debt for equity.” Comment on this statement. What steps might a board of directors take to ensure that the company’s actions are ethical with regard to all parties? 2. Stephanie’s Cafes, Inc., […]