Problem Set on Capital Structure1. A company estimates that its fixed operating costs are $500,000, and its variable costs are $3.00 per unit sold. Each unit produced sells for $4.00. What is the companyâs breakeven point? In other words, how many units must it sell before its operating income becomes positive?2. Harley Motors has $10 million in assets, which is financed with $2 million of debt and $8 million in equity. If Harleyâs beta is currently 1.2 and its tax rate is 40 percent, what is its unlevered beta, bU? 3. Grant Corporation currently has assets of $5 million. The firm is 100 percent equity financed. The company currently has net income of $1 million, and it pays out 40 percent of its net income as dividends. Both net income and dividends are expected to grow at a constant rate of 5 percent per year. There are 200,000 shares of stock outstanding, and it is estimated that the current cost of capital is 13.40 percent. The company is considering a recapitalization where it will issue $1 million in debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization, its before-tax cost of debt will be 11 percent, and the cost of equity will rise to 14.5 percent. The company has a 40 percent federal-plus-state tax rate.a. What is the current share price of the stock (before the recapitalization)?b. Assuming that the company maintains the same payout ratio, what will be its stock price following the recapitalization?c. Would you advise Grant to adopt the change in its capital structure? Why?4. Cyclone Software Company is trying to estimate its optimal capital structure. Cycloneâs current capital structure consists of 25 percent debt and 75 percent equity; however, management believes the firm should use more debt. The risk-free rate, rRF, is 5 percent, the market risk premium, (rM-rRF), is 6 percent, and the firmâs tax rate is 40 percent. Currently, Cycloneâs cost of equity is 14 percent, which is determined on the basis of the CAPM. What would be cycloneâs estimated cost of equity if it were to change its capital structure from its present capital structure to 50 percent debt and 50 percent equity.5. Currently, Bloom Flowers Inc. has a capital structure consisting of 20 percent debt and 80 percent equity. Bloomâs debt currently has an 8 percent yield to maturity. The risk-free rate, rRF, is 5 percent, and the market risk premium, (rM-rRF), is 6 percent. Using the CAPM, Bloom estimates that its cost of equity is currently 12.5 percent. The company has a 40 percent tax rate.a. What is Bloomâs current WACC?b. What is the current beta on Bloomâs common stock?c. What would Bloomâs beta be if the company had no debt in its capital structure? (That is, what is Bloomâs unlevered beta, bU?) Bloomâs Financial staff is considering changing its capital structure to 40 percent debt and 60 percent equity. If the company went ahead with the proposed change, the yield to maturity on the companyâs bonds would rise to 9.5 percent. The proposed change will have no effect on the companyâs tax rate.d. What would be the companyâs new cost of equity if it adopted the proposed change in capital structure?e. What would be the companyâs new WACC if it adopted the proposed change in capital structure?f. Would you advise Bloom to adopt the proposed change in capital structure? Explain.
Our Service Charter
-
Excellent Quality / 100% Plagiarism-Free
We employ a number of measures to ensure top quality essays. The papers go through a system of quality control prior to delivery. We run plagiarism checks on each paper to ensure that they will be 100% plagiarism-free. So, only clean copies hit customers’ emails. We also never resell the papers completed by our writers. So, once it is checked using a plagiarism checker, the paper will be unique. Speaking of the academic writing standards, we will stick to the assignment brief given by the customer and assign the perfect writer. By saying “the perfect writer” we mean the one having an academic degree in the customer’s study field and positive feedback from other customers. -
Free Revisions
We keep the quality bar of all papers high. But in case you need some extra brilliance to the paper, here’s what to do. First of all, you can choose a top writer. It means that we will assign an expert with a degree in your subject. And secondly, you can rely on our editing services. Our editors will revise your papers, checking whether or not they comply with high standards of academic writing. In addition, editing entails adjusting content if it’s off the topic, adding more sources, refining the language style, and making sure the referencing style is followed. -
Confidentiality / 100% No Disclosure
We make sure that clients’ personal data remains confidential and is not exploited for any purposes beyond those related to our services. We only ask you to provide us with the information that is required to produce the paper according to your writing needs. Please note that the payment info is protected as well. Feel free to refer to the support team for more information about our payment methods. The fact that you used our service is kept secret due to the advanced security standards. So, you can be sure that no one will find out that you got a paper from our writing service. -
Money Back Guarantee
If the writer doesn’t address all the questions on your assignment brief or the delivered paper appears to be off the topic, you can ask for a refund. Or, if it is applicable, you can opt in for free revision within 14-30 days, depending on your paper’s length. The revision or refund request should be sent within 14 days after delivery. The customer gets 100% money-back in case they haven't downloaded the paper. All approved refunds will be returned to the customer’s credit card or Bonus Balance in a form of store credit. Take a note that we will send an extra compensation if the customers goes with a store credit. -
24/7 Customer Support
We have a support team working 24/7 ready to give your issue concerning the order their immediate attention. If you have any questions about the ordering process, communication with the writer, payment options, feel free to join live chat. Be sure to get a fast response. They can also give you the exact price quote, taking into account the timing, desired academic level of the paper, and the number of pages.