Assignment: Capital Structure PART A 1. Apple Corporation has 2.5 million shares outstanding with a market value of $2.00 each (expected return = 16%) and debt with a market value of $1‚ 000‚000 and a return of 10% Required a. What is the return on the capital of Apple Corporation? [Show all workings and formulae) [7.5 marks] 2. Samsung generates pre-tax earnings of $2‚000‚000 per year. Currently it has issued 1 million shares which sell for $10 each. Samsung has no debt in
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of Diageo‚ the treasury team was given the task of establishing the cost of capital for each of the different areas the company operated. The team had to create a simulation model which should consider new finance approaches‚ treasury functions to focus on‚ what the firm’s risk footprints will be‚ how to calculate cost of capital and finally how to optimally structure capital. How has Diageo managed its capital structure? Both Grand Metropolitan and Guinness had little debt prior to the merger‚
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Chapter 12 Capital Structure and Leverage LEARNING OBJECTIVES After reading this chapter‚ students should be able to: • Explain why capital structure policy involves a trade-off between risk and return‚ and list the four primary factors that influence capital structure decisions. • Distinguish between a firm’s business risk and its financial risk. • Explain how operating leverage contributes to a firm’s business risk and conduct a breakeven analysis‚ complete with
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a) Repurchase of stock=RM15x100000shares=RM1500000 Equity after repurchase of stock=repurchase of stock-amount borrowed |Scenario |Amount borrowed(RM) |Equity after repurchase of stock(RM) | |1 |0 |1500000-0=1500000 | |2 |187500 |1500000-187500=1312500 | |3
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Question 5: Evaluate the Put-Warrant/Convertible Bond proposal. Does it solve Intel’s capital structure dilemma? What arguments might be made in favor of it? Intel’s capital structure dilemma was that it was holding too much cash on hand. Eventually‚ there were three available strategies or alternatives that Intel could undertake in terms of cash disbursement policies. First‚ it could continue or expand its market-repurchase program. Secondly‚ Intel could declare dividends to its shareholders
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CAPITAL STRUCTURE DECISIONS When a firm is seeking financing for a project it is usually a choice between additional debt financing or an additional equity issue‚ assuming internally generated funds are not sufficient. The chosen option of financing can make a difference to EPS (earnings per share )‚ which is an important investment analyst ratio. Example : Assume Cherokee Tire Co’s long term capitalization of $18 mill is as follows : Debt $5 mill @ 9 per cent.
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Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization ’s long term investments such as new machinery‚ replacement machinery‚ new plants‚ new products‚ and research development projects are worth pursuing. It is budget for major capital‚ or investment‚ expenditures.[1] Many formal methods are used in capital budgeting‚ including the techniques such as * Accounting rate of return * Payback period * Net present value * Profitability
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Kale et al (1991) suggests that the level of risk is one of the main determinants of a firm`s capital structure. By looking at the trade off theory we might expect a negative association when risk and leverage are concerned. If firms have high earnings volatility‚ for some obvious reasons‚ they would not want to indulge in debt financing. It follows that when firms are exposed to bankruptcy and agency costs greater is the incentive to reduce the level of debt otherwise the more volatile a firm`s
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Capital Structure and Profit Capital Structure Definition A unite of a company’s long-term debt‚ specific short-term debt‚ common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable‚ whereas equity is classified as common stock‚ preferred stock or retained earnings. Also‚ Short-term debt such as working capital requirements is considered
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Capital Structure Practice Problems 1. Hayfin Enterprises has the following operating results and capital structure: Hayfin Enterprises ($000s) | | | Financial Data | | Revenue | $ 6‚000 | Operating Expenses | $ (4‚500) | EBIT (Operating Profit) | $ 1‚500 | | | Debt | $ 1‚200 | Equity | $ 8‚800 | Total Capital | $ 10‚000 | Interest rate on debt = 9% Share price = $25 (MV = BV) The firm is contemplating
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