Break-even EBIT: Company X is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 160,000 shares of stock outstanding. Under Plan II, the company would have 80,000 shares of stock outstanding and $2.8 million of debt outstanding. The interest rate on the debt is 8 percent and assume No taxes.
A. If EBIT is $350,000, which plan will result in the higher EPS?
B. If EBIT is $500,000, which plan will result in the higher EPS?
C. What is the Break-even EBIT such that the company is indifferent in EPS between Plan I and Plan II.
Break-even EBIT and Leverage: Company Y is comparing two different capital structures. Plan I would result in 7,000 shares of stock and $160,000 in debt. Plan II would result in 5,000 shares of stock and $340,000 in debt. The interest rate on the debt is 10 percent.
A. Ignoring taxes, compare both of these plans to an ALL-EQUITY plan assuming the EBIT will be $39,000. The ALL-EQUITY plan would result in 11,000 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest EPS?
B. In part A, what are the breakpeven levels of EBIT for each plan as compared to that for an ALL-EQUITY plan? Is one higher than the other? Why?
C. IGNORING Taxes, when will EPS be identical for Plans I and II?
D. Repeat parts A, B, and C assuming that the corporate tax rate is 40 percent. Are the break-even levels of EBIT different from before? Why or why not?
Company Z has a debt-equity ratio of 1.5. Its WACC is 10 percent, and its cost of debt is 7 percent The corporate tax rate is 35%.
A. What is the company's costs of equity capital?
B. What is the company's UNLEVERED cost of equity capital?
C. What would be the cost of equity if the debt-equity ratio were 2.0? What if it were 1.0? What if it were zero?
Company ABC has no debit but can borrow at 8.2%. The firm's WACC is currently 11 percent, and the tax rate is 35 percent.
A. What is the company's cost of equity?
B. If the firm converts to 25 percent debt, what will its cost of equity be?
C. If the firm converts to 50 percent debt, what will its cost of equity be?
D. What is the company's WACC in part B? What is the company's WACC in part C?
Company B expects its EBIT to be $92,000 every year forever. The firm can borrow at 9 percent. Company B currently has no debt, and its cost of equity is 15 percent. If the tax rate is 35%, what is the value of the firm?
What will be the value of Company B if the company borrows $60,000 and uses the proceeds to repurchase shares?
What is the cost of equity AFTER recapitalization?
What is the WACC AFTER recapitalization?
Describe the implications for the firm's capital structure decision?
Company A is considering a change to its current, CASH-ONLY sales policy. The new terms of sale would be Net, one month. Based on the following information, determine if Company A should proceed. The required return is 1.5% per month
|
|
Current Policy
|
New Policy
|
|
Price per Unit
|
$780
|
$780
|
|
Cost per unit
|
$475
|
$475
|
|
Unit Sales/Month
|
1,420
|
1,505
|
Company C is considering a change to is sales policy. The current terms are Net, 30 days. It is considering going to a cash-only sales policy. Based on the following, what do you recommend? The required rate of return is 2 percent per month.
|
|
Current Policy
|
New Policy
|
|
Price per Unit
|
$334
|
$330
|
|
Cost per unit
|
$265
|
$260
|
|
Unit Sales/Month
|
1,310
|
1,250
|
George and Georgette both graduated in Finance from IUPUI, and they found employment at Company I as Accounts Payable specialists. Because of Game 6 for the 2016 NBA Finals, they skipped class and now don't know how to deal with Trade Credit Terms. The company received the following note from it's supplier: We will offer 1.50% 15, Net 45. That language looks like gobbledygook and they pay the full amount of the invoice, which has average $10,000 per month for the past several years. What is the percentage cost of their behavior on an annualized basis?
Company R borrows $1.5 Million from its bank at a rate of 3.5% with the requirement that the company must maintain a 15 percent compensating balance. What is the effective rate for this deal?
Company X has the following data: Credit Sales - $730,000; COGS - $285,000; Average inventory - $125,000; Average AIR - $225,000; Average A/R - $285,000; Opportunity Cost of Funds - 4.25%. Calculate the Cash Conversion Cycle.
What is the dollar cost of its cash conversion cycle in #33 above?
Finally, how many times a year does Company X turnover its cash from #33 above?
A company examined its cash management policy and found that it takes an average of five days for checks that the company writes to reach its bank and thus to be deducted from its checking account. On the other hand, an average of four days elapses from the time the company receives payments from its customers until the funds are available for use at its bank. One an average day, the company writes checks that total $70,000, and it receives checks from customers that total $80,000.
a. Compute Disbursement Float,
b. Collection Float, and
c. NET FLOAT in dollars. Label each answer.
d. It the company has an opportunity cost equal to 10 percent, how much would the company be willing to spend each year to reduce collection float by two days?
Company X has a beginning cash balance of $200,000 on February 1, MU& History shows the company collects from sales as follows: 8% from current month sales; 20% collected 1 month after the sale; 45% collected in the rd month after the sale, 20% collected in the 3rd month after the sale, and 7% collected in the 4th month after the sale. Construct a forecast of cash receipts using the Accounts Receivable Balance Pattern technique for the month of July:
February Sales: $750,000
March Sales: $685,000
April Sales: $960,000
May Sales: $700,000
June Sales: $352,000
July Sales: $587,000
August Sales: $670,000