Advanced Managerial Finance Mini Case
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Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company 's EBIT was $50 million last year and is not expected to grow. The firm is currently financed with all equity, and it has 10 million shares outstanding.
When you took your corporate finance course, your instructor stated that most firms ' owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea.
As a first step, assume that you obtained from the firm 's investment banker the following estimated costs of debt for the firm at different capital structures:
P e r c e n t F i n a n c e d w i t h D e b t , w d r d 0% - 20 8.0% 30 8.5 40 10.0 50 12.0
If the company were to recapitalize, then debt would be issued and the funds received would be used to repurchase stock. PizzaPalace is in the 40% state-plus-federal corporate tax bracket, its beta is 1.0, the risk-free rate is 6%, and the market risk premium is 6%.
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A. Provide a brief overview of capital structure effects. Be sure to identify the ways in which capital structure can affect the weighted average cost of capital and free cash flows.
The value of a firm’s operations is the present value of its expected future FCF discounted at its WACC. Some
Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company 's EBIT was $50 million last year and is not expected to grow. The firm is currently financed with all equity, and it has 10 million shares outstanding.
When you took your corporate finance course, your instructor stated that most firms ' owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea.
As a first step, assume that you obtained from the firm 's investment banker the following estimated costs of debt for the firm at different capital structures:
P e r c e n t F i n a n c e d w i t h D e b t , w d r d 0% - 20 8.0% 30 8.5 40 10.0 50 12.0
If the company were to recapitalize, then debt would be issued and the funds received would be used to repurchase stock. PizzaPalace is in the 40% state-plus-federal corporate tax bracket, its beta is 1.0, the risk-free rate is 6%, and the market risk premium is 6%.
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A. Provide a brief overview of capital structure effects. Be sure to identify the ways in which capital structure can affect the weighted average cost of capital and free cash flows.
The value of a firm’s operations is the present value of its expected future FCF discounted at its WACC. Some