NEED A PERFECT PAPER? PLACE YOUR FIRST ORDER AND SAVE 15% USING COUPON:

SOLVED

21) Which of the following is a limitation to the Weighted Average Cost of Capital approach? A) Later projects may be rejected as not meeting the hurdle rate because cheaper funding was used up on an earlier project. B) Capital structures and interest rates are highly dynamic, always creating inconsistency in determining an overall cost of capital. C) The approach assumes that there will be more than one form of capital in the structure thereby being inapplicable to companies funded solely by common shares. D) Different investment decisions have different levels of risk and this is not taken into account in the model. E) An insufficient number of companies use this method of evaluating their capital structure to trust in its reliability. 22) Company A has $45 million worth of common share capital, $3.5 million in retained earnings, $30 million in long-term debt and $2.5 million in preferred shares. Company B has $22.5 million of common share capital, $3 million in retained earnings, $51 million in long-term debt and $4.5 million in preferred shares. If both companies face a tax rate of 32%, cost of common share capital of 11%, cost of debt capital of 8%, cost of preferred share capital of 9.5%, which company is more highly levered? A) Company A with a leverage ratio that equals 40.1% B) Company B with a leverage ratio that equals 68.5% C) Company A with a leverage ratio that equals 8.9% D) Company B with a leverage ratio that equals 7.4% E) Company B with a leverage ratio that equals 71.2% 23) Rekka Resin Moulding Inc. has a 28% tax rate, 3 million common shares outstanding at a price of $18.25 each, pays 7.5% interest on its long-term debt of $55 million and pays $1 million in dividends to preferred shareholders. Last year the company had an EBIT of $15 million. This year the company expects an EBIT of $12 million. What is the company experiencing? A) A degree of financial leverage of 0.7. B) No degree of financial leverage of 0.9. C) No degree of financial leverage of 1.3. D) A degree of financial leverage 1.6. E) A degree of financial leverage of 2.1. 24) Bowden Building Supply reported an EBIT of $5,531,500, has a 35% tax rate, pays interest of $480,000 on $9,290,000 of debt and $0.60 to each of its 500,000 common shares outstanding. What is the company experiencing? A) No presence of financial leverage as indicated by a ratio of 0.6. B) No presence of financial leverage as indicated by a ratio of 1.0. C) No presence of financial leverage as indicated by a ratio of 1.3. D) The presence of financial leverage as indicated by a ratio of 1.1. E) The presence of financial leverage as indicated by a ratio of 1.8. 25) Last year Monaco Hotels distributed $26.25 million in dividends to its seven million common shareholders. Monaco Hotels is planning a $75 million resort hotel in Tobago. The expected income before income taxes is $20 million of which 25%Â will be distributed to the 7 million common shareholders over and above the amount of dividends equivalent to those distributed last year. Common shares trade for $42 per share. 1.3 million Class A cumulative preferred shares trade for $16.40 and carry a dividend of $1.23 per share. The company can fund the project through an issue of a new class of irredeemable cumulative preferred shares priced at $14 a share with a return rate similar to that of the Class A shares. Alternatively, it can issue of bonds with a face value of $1,000 and an interest rate of 6.8%. Applying a tax rate of 24% and ignoring issuing costs, which option will provide the highest incremental EPS from the project? A) The bond option providing an incremental EPS of 0.40 B) The equity option providing an incremental EPS of $1.42 C) The bond option providing an incremental EPS of $1.62 D) The equity option providing an incremental EPS of $2.17 E) The bond option providing an incremental EPS of $6.07 26) When assessing the impact of leverage on capital structure decisions, a company can determine how much confidence it has in its choice of financial options by using the EBIT-EPS indifference chart. How is an EBIT-EPS indifference chart used? A) By calculating the slope of the line at the indifference point. B) By observing the position of the indifference point relative to EPS. C) By calculating the slope of the line of the chosen financial option. D) By observing the size of the margin of safety triangle that appears between and below the lines formed by the financial options. E) By determining the distance between the indifference point and the expected level of earnings before interest and taxes. 27) JY Electronics has EBIT of $35 million, interest expense of $4.5 million, a tax rate of 24% and 15 million common shares outstanding. It is looking for $22 million in long-term capital to finance a project that will provide an increase to EBIT of $3.5 million each year. It could fund the project by issuing bonds with a coupon rate of 9.1% or issuing 2.2 million shares at $10 each. Ignoring issuing expense, at what level of EBIT is JY Electronics indifferent as to the financing option? A) $0.64 million B) $20.14 million C) $35.64 million D) $55.15 million E) $107.02 million 28) A business has a times-interest-earned ratio of 12, a leverage ratio of 22%, an EPS of $2.23 on a share price of $19.75. Inflation is just below 3.5%, the economy is stable and the rate for government bonds is 5%. The business is in a highly dynamic market and is looking for capital financing which will impact 15% of its capital structure. How should the company finance its new investment opportunity? A) Debt. B) Common shares. C) Retained earnings. D) Preferred shares. E) 50% debt and 50% equity. 29) Which of the following is a disadvantage to a business of using debt to finance its capital projects? A) Contributes to the dilution of management control. B) Takes longer to acquire than equity financing. C) By making the business riskier, contributes to a higher weighted average cost of capital. D) Is more expensive than equity financing because of tax considerations. E) Reduces the positive impact of leverage in a company with growing earnings. 30) In the Traditional view, at what level of borrowing does the Optimal Capital Structure occur? A) Shareholders’ marginal demand for risk compensation due to borrowing is just equal to the increased returns from borrowing. B) The cost of common share capital is equal to the cost of borrowing. C) The benefits arising from tax relief due to borrowing are offset by the potential cost of bankruptcy. D) Shareholders are no longer indifferent to the risks associated with borrowing. E) There is any borrowing as shareholders always demand risk compensation equal to the increased returns from borrowing.

Solution:

15% off for this assignment.

Our Prices Start at $11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!

Why US?

100% Confidentiality

Information about customers is confidential and never disclosed to third parties.

Timely Delivery

No missed deadlines – 97% of assignments are completed in time.

Original Writing

We complete all papers from scratch. You can get a plagiarism report.

Money Back

If you are convinced that our writer has not followed your requirements, feel free to ask for a refund.