--%>
Assignment Help - homework help

Problem on optimal capital structure

XYZ Company has debt/assets ratio 50%, that is too high and it must be at 45% to be optimal. This debt reduction must also reduce the bankruptcy costs by $30 million. At present, XYZ has 5 million shares of common stock selling at $50 each. The tax rate of XYZ is 30%. How many shares of stock must the company sell, and buy back bonds from the proceeds, to achieve its optimal capital structure?

E

Expert

Verified

Given,
Value of equity = 5 million*$50 = $250 million
Debt/assets ratio = 50%
Hence value of debt = $250 million
Value of Altoona Company = $500 million
Value of firm after recapitalization, V = 500 – 0.45*V*.3 + 43.35
1.135 V = 543.35
Value of firm = 478.72 million
Value of equity = 263.3 million
Number of shares = 5.266 million
Hence 265,900 shares must be issued.

   Related Questions in Corporate Finance

  • Q : State Exploitation of favorable market

    Exploitation of favorable market conditions: The firms after estimating WCR are in a position to clearly identify their status of excess current assets. After this realization they can use this knowledge to encash conditions arising in market even for

    		•
  • Q : Who explained the high-peak/fat-tails

    Who explained the high-peak/fat-tails?

    		•
  • Q : Convertible Bonds-Corporate Bonds State

    State the term Convertible Bonds in Corporate Bonds?

    		•
  • Q : Explain consensus among the chief

    Is there any consensus among the chief authors in finance concerning the market risk premium?

    		•
  • Q : Is this better to repurchase shares or

    Assuming a company needs to distribute money to shareholders of it, is this better to repurchase shares or to distribute dividends?

    		•
  • Q : Is the price of futures the excellent

    Is the price of futures the excellent estimate of €/$ exchange rate?

    		•
  • Q : Tax benefits of lease FedEx would like

    FedEx would like to acquire 300 vans for its business. It can buy each van for $35,000, depreciate it completely over 5 years, and then sell it for $10,000. The tax rate of FedEx is 30%, and its cost of debt is 10%. Avis Fleet Rental will lease these vans to FedEx for

    		•
  • Q : Who proposed modern quantitative

    Who proposed a modern quantitative methodology for portfolio selection?

    		•
  • Q : Explain market efficiency hypothesis

    According to what I read inside a book, market efficiency hypothesis means that the expected average value of variations is zero in the shares price. Thus, the best estimate of the future price of a share is its price now, as this incorporates all the available inform

    		•
  • Q : Problem on annual lease payments Taurus

    Taurus Corporation needs a computer, which it can buy for $100,000. Taurus will depreciate the computer uniformly over its useful life of 5 years. An investment tax credit of 7% is also available, and the computer will have no residual value. Taurus plans to borrow th

    		•