Intermediate Finance Midterm Winter 2010

8) What would BV's 1988 earnings per share be after all of the above adjustments?

We defined several criteria to determine our choice – return, risks and other quantitative and qualitative factors. Targeting a debt ratio of 40% will maximize the firm’s value. A higher earning’s per share and dividends per share will lead to a higher stock price in the future. Due to leveraging, return on equity is higher because debt is the major

In order for us to manage a company’s long-term debt obligations, financial leverage ratios are used. The basic question that is asked is; can the company meet its obligations over the long term? In order to answer this question, we look at three ratios, debt ratio, times interest earned, and cash coverage ratio. The debt ratio was figured to

14) Various Capital Structures Character Enterprises currently has $1.5 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding is the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, and 90%.

New Price of share $ 36.92 price prior to debt +increase in price of share post debt

If a company earns net income of $25 million in Year 8, has 10 million shares of stock, pays a dividend of $1.00 per share, and has annual interest costs of $10 million, then | |

In this scenario, Christopher’s suggestion to increase the use of its equity financing, instead of the cost of debt, is more advantageous since equity financing would only cost the company 20% instead of 25%. By focusing on the equity financing to supplement and to finance its industry, it would cost less burden for the company, since there is no loan to repay or repayment obligation and this option could allow to channel more money towards its gross profit (Kunigis, 2018). In this regard it will also be beneficial for investors, knowing that they would incur good return in value if the William Industry is able to increase its sales. In that case, it would strengthen the investor’s financial backing due to the increase of its profit. Moreover,

4%. So the use of financial leverage this because they are movie to increase from 12% to 16.4% because the ROI 20% exceeds the cost as debt (9%) used to finance a portion of the assets. If there are two other measurements included and financial leverage they are the debt ratio in the debt/equity ratio. Financial leverage uses two ratios to measure the relationship between debt and equity. “The debt ratio is the ratio of the total liabilities to the total liabilities and stockholders’ equity debt/equity ratio is the ratio of total liabilities two that toggles holders equity. ” (Marshall, 2014). Using the example of aspen conservation the average the debt ratio would be $4000/$10,000 or 40% off an the debt/equity ratio would equal $4000/$6000 or 5%. Using financial leverage does incur some amount of risk. Financial leverage magnifies stockholder equity in a positive way when the ROI is larger then the debt. However, the fallback is that same magnification applies in a negative way if the firm fails to pay its debts. The other benefit of borrowing capital at a lower rate than the rate of return is the interest rate of the investment can be taken off taxes. The increase in stockholder’s equity and tax write-offs support the incentives for carrying a large amount of financial leverage. However, most nonfinancial firms will carry a debt ratio below 50% and a debt/equity ratio of less than one. In the mid 2006 to 2008 some companies found themselves in a

alone has the ability to increase profits. The company’s debt is very low as indicated by the debt ratio of

Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE.

3. THE EFFECT ON CASH FLOW, BALANCE SHEET AND FINANCIAL PERFORMANCE – THE REASON TO PREFER A DEBT RATIO OF 15%

Questions 1. If Symonds Electronics Inc. were to raise all of the required capital by issuing debt, what would the impact be on the firm’s shareholders? The impact on shareholders can be analyzed by calculating the EPS and ROE of the firm under the alternative scenarios as follows: All Debt With $5,000,000 Expansion Current Growth in Revenues Revenues EBIT Interest EBT EBT*(1-T) # of shares EPS Debt Equity Debt/Equity Ratio Return on Equity 15,000,000 2,250,000 0 2,250,000 1,350,000 1,000,000 1.35 0 15,000,000 0.00% 9.00% Worst Case 10% 16,500,000 2,475,000 500,000 1,975,000 1,185,000 1,000,000 1.185 5,000,000 15,000,000 33.33% 7.90% Expected Case 30% 19,500,000 2,925,000 500,000 2,425,000 1,455,000 1,000,000 1.455 5,000,000 15,000,000

2. What is the expected value of the Company’s debt with and without the expansion?

While in table 2 is illustrated, where the additional value from an increased leverage is going, we now have a closer look at where the change in value is coming from. For this purpose, we divide the free cash flow of the firm into pure business flows and cash flows resulting from financing effects and discount them at a consistent rate reflecting the cash flows’ risk.

Shares outstanding after the repurchase: 100 000 000 – 23 076 923 = 76 923 076.