Leverage ratio problem, Handy Inc has debt-to-assets ratio of 40%, tax rate of 35%, and

Leverage ratio problem

Handy Inc has debt-to-assets ratio of 40%, tax rate of 35%, and total value of $100 million. W. C. Handy, the CFO, would like to increase the leverage ratio to 42%, and he believes that there will be no change in the bankruptcy cost of the company. How many dollars worth of 12% coupon bonds should the company sell, and buy back its own stock, to achieve the financial restructuring?

View Complete Question

Comments & Conversion

Expert

Verified

Since debt-to-asset ratio is 40% and total value is $100 million, the current debt value is $40 million. Hence current PV of tax benefits is 14.

Hence value of unlevered firm is 100 – 14 = $86 million

Value of levered firm = 86 million + 14.7 million = 100.7 million
Value of debt = 0.42*100.7 = 42.294 million

Hence the value of debt to be issued and value of shares to be bought back is $2.294 million.

Related Questions in Corporate Finance

Q : Relationship between flow to

Is there any relationship in between the flow to shareholders and the net income?

Q : Explain realization of name valuation

I suppose that a valuation consciously realized in my name tells me how much I have to offer for the company, am I right?

Q : Compute the present value of the

Is this possible to value companies by computing the present value of the Economic Value Added (EVA)?

Q : State capital formation Capital

Capital formation: It is an increase in the stock of capital in particular period is termed as capital formation.

Q : Problem on raising new capital AB

AB Corporation has 3 million shares of common stock selling at $19 each. It also contains $25 million in bonds with coupon rate of 8%, selling at par. AB requires $10 million in new capital that it can raise by selling stock at $18, or bonds at 9% interest. The expect

Q : Bank assignment You have just been

You have just been hired as the branch manager for a big bank in XYZ. You were told that the bank is going to open a new branch at Island Learning Centre of the Open University of XYZ. The management of the bank is much concerned that the new branch might not be able

Q : Intrnational financer what are the

what are the objectives of international finance

Q : Market for Corporate Bonds Write some

Write some point regarding Market for Corporate Bonds.

Q : WCR fend off takeover bid WCR fend off

WCR fend off takeover bid: The WCR estimation ensures that a firm takes corrective action in time to correct its WC status. This ensures that the firm is always in a positive WC status. In other words, the firm will be able to pay off all its short-te

Q : Corporate Earnings Analysis exercise

Identify two comparable corporations. Explain why you think they are comparable to your corporation. Earnings analysis: Do an earnings analysis of your corporation. Calculate and plot.

Discover Q & A

Leading Solution Library

Avail More Than 1442299 Solved problems, classrooms assignments, textbook's solutions, for quick Downloads

No hassle, Instant Access

Start Discovering

18,76,764

1955839
Asked

3,689

Active Tutors

1442299

Questions
Answered

Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!

Submit Assignment