appropriate level of debt to issue for the William Wrigley Jr. Company (referred to as Wrigley). The chosen capital structure is based on efforts to minimize the Weighted Average Cost of Capital (WACC) while also reducing increases in the cost of equity. The following pertains to analysis performed at four proposed levels of debt. In the base case‚ the corporation increases its debt level to 3 billion dollars. In this situation‚ the cost of equity is 11.05% and the cost of debt is 13%. This creates
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involved in the budget approval process‚ and the operating strategy has very important part to keep the costs under control. For the financial risk‚ the more debt financed the higher financial risk it is. The company’s risk avoidance strategy is manifested in its financing decision. The company is managed in preference for equity finance and against debt finance‚ investments are funded internally. The optimal capital structure for Hill Country The optimal capital structure is the capital structure at
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that some of its accounts receivable will not be collected. It will debit Bad Debt Expense and credit Allowance for Uncollectible Accounts. This will result in reduction of “Current Assets” on balance sheet. Income Statement: This will also result in an expense on the income statement (Earlier than it would have been under direct write-off). This will reduce the Net Income by the Bad Debt Allowance Amount. If the Bad Debt allowance is not in line with the actual write-offs trend in previous periods
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Total debt to equity used to measure a company’s financial leverage‚ calculated by dividing a company’s total liabilities by its stockholder’s equity. This ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity. Most company is taking on debts as to increase its value by using borrowed money to fund various projects. A high debt/equity ratio generally means that a company has been aggressive in financing its growth
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May 2006 McCombs Research Paper Series No. FIN-03-06 A Dynamic Model of Optimal Capital Structure Sheridan Titman McCombs School of Business The University of Texas at Austin e-mail: titman@mail.utexas.edu Sergey Tsyplakov Moore School of Business The University of South Carolina‚ Columbia‚ SC This paper also can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract/332042 A Dynamic Model of Optimal Capital Structure∗
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is considering a debt-for-equity recapitalization. In the deal‚ UST will issue $1 billion debt to buy back stocks. In class we argue that an important determinant of a firm’s debt policy is the tradeoff between the tax benefits of debt and the costs of financial distress and bankruptcy. Mature firms generating positive and stable operating income are more likely to take advantage of the debt tax shields and less likely to verge on bankruptcy‚ and thus may consider using more debt in their capital
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theory‚ it helps to determine the debt proportion and maintain optimal balance in order to maximise company’s market value. However‚ pecking order theory promotes that companies tend to issue debts when company has internal financial deficit or deviation from target capital leverage. Hence‚ it shows mixed evidences such as Shyman-Sunder and Myers (1999) found more supportive evidences for pecking order theory but Hovakimian‚ Opler and Titman (2001) examines that firms’ debt-equity issuance choice is significant
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the proposed levels of debt shown in Exhibit 3? Financial risk is a function of the company’s business risk multiplied by the debt/equity (D/E) ratio. Thus the higher the D/E ratio‚ the greater the leverage and financial risk. The following table provides the D/E ratios at each proposed level‚ which indicate the factor of increased financial risk. Current structure: no financial risk Risk at 30% debt: Financial risk is roughly half of business risk Risk at 50% debt: Financial risk is the
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exclusively use debt (iii) exclusively use preference capital (iv) use a combination of (i) and (ii) in different proportions (v) a combination of (i)‚ (ii) and (iii) in different proportions (vi) a combination of (i) and (iii) in different proportions and so on. The choice of the combination of the various sources would be one which‚ given the level of earnings before interest and taxes‚ would ensure the largest EPS. Generally cost of debt is lower than cost of equity. Therefore raising debt (trading
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Financial Decision Making Final Project Case analysis: Marriott Corporation Introduction and background The Marriott Corporation‚ an American firm‚ was founded in 1927 by J.Willard Marriot.The company began as a small beer stand and soon began to sell food and provided lodging that expanded rapidly. With the help of his wife Alice‚ the family owned business had 45 restaurants in nine states by 1940 and grew into one of the leading service companies. The Company has three major lines
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