--%>
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 : How can industrial company inflate

    How can any industrial company inflate the value of its inventory so as to decrease net income and the taxes is has to pay in a year?

    		•
  • Q : Could we explain that the shares’ value

    Could we explain that the shares’ value is intangible?

    		•
  • Q : Selling or purchasing problem Atlas

    Atlas Realty Company is interested in buying a house and renting it out for $12,000 a year, collecting the rent in advance each year. This will depreciate the house over 25 years; however sell it after 15 years at twice its purchase price. The maintenance expenditures

    		•
  • Q : Option Trading Strategies Explain the

    Explain the term Option Trading Strategies?

    		•
  • Q : Data Case Please Assist with the

    Please Assist with the attached Data Case Assignment

    		•
  • 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.

    Q : Problem on Decision variables A factory

    A factory has three distinct systems for making similar product: System 1: Worker runs 3 machines of type-A, each of which costs $20 per day to run, each generates 100 units per day and the worker is paid $40 per day.System 2

    		•
  • Q : Explain valuation method for

    We were assigned a valuation of a pharmaceutical laboratory’ shares. Which valuation method is further convenient?

    		•
  • Q : Calculate the risk-free rate You have

    You have been given the following information on two corporations; you are to assume that thesecurities are correctly priced. My Corp, Inc. has a Beta of 1.25 and an Expected Return of .145;Your Corp, Inc. has a Beta of .75 and an Expected Return of .095. Based on the

    		•
  • Q : Explain the branching structure of the

    Explain the branching structure of the binomial model.

    		•