capital structure decisions problems and solutions

0000031934 00000 n 0000040717 00000 n PROBLEMS AND SOLUTIONS . The current market price per share of its common stock is $39, and the â¦ 0000017642 00000 n S2 Million; (4) Rd 10%; (5) Rs 15%; (6) Shares Of Structure Stock Outstanding, N 600,000; And (7) Stock Price, P S30. 0000030238 00000 n 0000020864 00000 n What is Pay Back Periodand how to understand that letâs discuss this by considering the below example? 0000031249 00000 n 0000033930 00000 n 0000004726 00000 n Capital structure questions and answers on topics like capital structure, principles of capital structure management, internal & external factors affecting capital structure. Question: Chapter 15 Capital Structure Decisions 647 TEST PROBLEM S Solutions Shown In Appendix A ST-1) The Rogers Company Is Currently In This Situation: (1) EBIT $4.7 Million; (2) Tax Rate, Nal Capital R-4096 (3) Value Of Debt, D . The optimal capital structure simultaneously maximizes EPS and minimizes the WACC. 0000012314 00000 n 0000014689 00000 n Kau Real Estate Kau Real Estate Inc currently uses no debt. Assume that the firm operates under the perfect capital market with corporate taxes as argued by Modigliani and Miller. 0000022375 00000 n 0000026352 00000 n In its narrow sense, the term âCapitalisationâ is used in its quantitative sense and refers to the process of determining the quantum of funds that a firm needs to run its business. business. k = IRR = 10% (calculator solution: 10.0%) The IRR < cost of capital; reject the project. Solution : WACC = (Cost of Equity x % Equity) + (Cost of Debt x % Debt). Capital structure decisions are vital since they directly affect the performance of firms. 0000010466 00000 n 0000019421 00000 n From a technical perspective, the capital structure is the careful balance between equity and debt that a business uses to finance its assets, day-to-day operations, and future growth. 0000016141 00000 n 2. 0000023564 00000 n 0000033526 00000 n 0000008246 00000 n Please make sure to answers. 0000018197 00000 n 0000015402 00000 n Whereas excessive use of debt may endanger their very survival, a conservative policy deprives them of its advantages to magnify the equity rates of return. Questions on Capital Structure Optimal capital structure Answer: e Diff: E 1. 0000032402 00000 n Solutions to capital budgeting practice problems Capital budgeting and cash flows 1. 0000025213 00000 n 0000014159 00000 n As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS. Firm A Firm B Discount rate for earnings stream 10% 12% 0000024910 00000 n 0000025414 00000 n 0000028950 00000 n 0000015823 00000 n 0000008739 00000 n Capital Structure Policy involves a trade-off between risk and return 1) Using more debt raises the riskiness of the firmâs earnings stream. Capital Structure Problem and Solution: Problem 12, Chapter 19 from Damodaran, Corporate Finance, Theory and Practice. Problems and Solutions: Problems on Capital Structure: The Choices (Download solutions in pdf file 0000002932 00000 n 0000006783 00000 n B. blend of equity and debt used by the firm. Describe the capital structure that you would use to run your You have been asked by JJ Corporation, a California-based firm that manufactures and services digital satellite television systems, to evaluate its capital structure. Modigliani and Miller proposed that capital structure is irrelevant when there are no taxes and that 100% debt is the optimal capital structure when there are taxes. 0000010757 00000 n For the all-equity capital structure, the interest paid is zero. 0000035309 00000 n 0000033766 00000 n 0000013405 00000 n Debt is cheaper compared to equity , debt provides an interest tax shield that helps the business reduce its overall. The capital structure that I would use in my business would be 40% and 60% equity. Capital Structure is the mix between ownerâs funds and borrowed funds. 0000009749 00000 n CAPITAL BUDGETING DECISIONS Problem-4 Given Information, Materials, labors, and other direct expense of operations will be reduced by Rs 16,000 per year if the proposed new machine is installed. H��U{P��@��f�nS��5�JE��Р�)M@��[kP$��a��$�A�Rݴ�omYP�ۑ��Z+XK�Z�P�n,`q��:��[;s��̙�;��}3�A�� 11G! 0000024157 00000 n 0000010186 00000 n View desktop site, The capital structure that I would use in my business would be 40% and 60% equity. Describe the Importance of cost of capital in Decision making. EBIT is expected to be $6,000 forever and the cost of capital is currently 12%. 0000009554 00000 n 0000026979 00000 n 0000044902 00000 n 0000035149 00000 n 0000012800 00000 n 2) However, a higher debt ration generally leads to a higher expected rate of return. 0000021351 00000 n It tells that overall cost of capital is independent of degree of leverage. 0000034825 00000 n 0000019775 00000 n 0000023857 00000 n An increase in the rate of depreciation will cause the cash flows from depreciation (the In Lakhs) Particulars Option I Option II Option III Equity Debt 22.5 2.5 15 10 10 15 EBIT 5 5 5 0000011891 00000 n Debt is cheaper compared to equity , debt provides an interest tax shield that â¦ 0000005279 00000 n 0000012480 00000 n The $5 million is a sunk cost: whether or not the firm goes ahead with the new product, the $5 million has been spent. 1 Solutions to Capital Structure Problems 1. Explain the different types of costs related to the cost of capital. Capital Structure. [ i.e., Annual incremental saving (or Annual Diff. 0000017306 00000 n 0000033474 00000 n 0000030216 00000 n %PDF-1.3 %�� 0000031489 00000 n 0000027351 00000 n Terms 0000014896 00000 n 0000034579 00000 n 0000016843 00000 n 0000012008 00000 n Central characteristics of capitalism include capital accumulation, competitive markets, a price system, private property and the recognition of property rights, voluntary exchange and wage labor. EBIT is expected to be $6,000 forever and the cost of capital is currently 12%. 0000018788 00000 n C. capital gains available on the firm's stock. Determine KTCâs weighted average cost of capital if the firm proceeds with raising external funds. �ؓ@Az��u��$��>Ax$�o�{�?��_ ��S��9�gQ�+ӎ#u{��,i��SI��o�R$e��,Ԣ9��r��⶷f�coհ�-�L�Ѯv��_)�*��ޝu�{k��Xq�s ўx��Z��[n-�9��'��s�uL��g��E�X�ntu��ǳ��5��Mv��`L�Bݚ��O�q�>�>�D��#c��=�T�8ġ��W��%m Capital Investment Decisions Problems And Solutions Exercises Author: 2017.thailandzocialawards.com-2021-02-13T00:00:00+00:01 Subject: Capital Investment Decisions Problems And Solutions Exercises Keywords: capital, investment, decisions, problems, and, solutions, exercises Created Date: 2/13/2021 10:18:33 PM To find the breakeven EBIT for two different capital structures, we simply set the equations equal to each other and solve for EBIT. 0000031722 00000 n 0000005238 00000 n 0000034346 00000 n a) What is the market value of Kau Real Estate? Problem No.2 Calculation of EPS under all the three options (Rs. 0000040638 00000 n 0000017883 00000 n 0000017134 00000 n 0000039362 00000 n 0000031882 00000 n Capital Structure Decisions Describe The Capital Structure That You Would Use To Run Your Business. 0000013540 00000 n 461 0 obj << /Linearized 1 /O 463 /H [ 3029 1720 ] /L 232867 /E 46526 /N 8 /T 223528 >> endobj xref 461 129 0000000016 00000 n This approach was also proposed by David Durand. 0000032674 00000 n Calculate the weighted average cost of capital for three different alternatives and analyse the capital structure decision. Please solve each problem in Excel. trailer << /Size 590 /Info 459 0 R /Root 462 0 R /Prev 223517 /ID[<0a5440a63b18c81227e012f504b88621>] >> startxref 0 %%EOF 462 0 obj << /Type /Catalog /Pages 458 0 R /Metadata 460 0 R /PageLabels 457 0 R >> endobj 588 0 obj << /S 1268 /L 2201 /Filter /FlateDecode /Length 589 0 R >> stream 0000035721 00000 n Which of the following statements is most correct? Decision: since the WACC is minimum 20% of debt and 80% equity represents optimum capital structure. Problem 1. Capital structure decisions refer to the: A. dividend yield of the firm's stock. Finance 100 Problem Set Capital Budgeting (Alternative Solutions) Note: Where appropriate, the \ï¬nal answer" for each problem is given in bold italics for those not interested in the discussion of the solution. 4. }��~�Ֆ��h��x�̏U��U��=��b��o�G{�?�㼌�6�\e|za�Ź��3 Wء��ڦi��1��x�V%h�ܖ>��s�图�`3�h��Y�1K��Kn�tʵKWdg�>��*��~�͑?�*R��̦��I��?~8��>��XEwڙ��nYUBm1^��nUJ��L��᜜�.SnN��n��r�%y9�+� �Q��7k�_I)+|�ԢX��V��ɒ��Mk��PدZؼN��xkQ��"��_��;gX ��;�s��6�U=�O�y�|c^��Oo|{}��gC��K�g]��9�s�#��k�_�GwV��e��fFB��E�DT� �l ��9{��B �C�U�� Debt-equity for all debt = ($0.4+0.5) / $0.6 = 1.5 Debt-equity for all equity = $0.4 / ($0.6+0.5) = 0.3636 2. 0000019080 00000 n 0000020549 00000 n Solution: Letâs say in a year one and so on the company recover a profit as listed in the table below. Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. b. 0000015509 00000 n (Barine, 2012). 0000010925 00000 n 0000036791 00000 n 0000014264 00000 n 0000013488 00000 n 0000043395 00000 n ÷ $10,000 = PVIFA k%,10 yrs. 0000015150 00000 n 0000027374 00000 n Calculator solution: 17.29% (c) Project Y, with the higher IRR, is preferred, although both are acceptable. 0000020004 00000 n 0000023015 00000 n Questions for freshers and experienced for bank interview, competitive exams, placement interview, finance interview, manager interview, university exams CA, CS, ICWA etc. 0000035469 00000 n If we presume, along with Milken (2009, p. A21) that it is important to maintain optimum levels of debt and equity in that capital structure, decision makers must constantly be in control of capital structure determinants. 0000025051 00000 n The corporate tax rate is 40%. I. Formulas This section contains the formulas you might need for this homework set: 1. 0000016389 00000 n Problem 6. Privacy Capital structure is the combination of debt and equity that make the total capital of firms. 0000014637 00000 n A comprehensive guide to making better capital structure and corporate financing decisions in today's dynamic business environment. 0000011646 00000 n 0000019221 00000 n 0000008991 00000 n 0000004749 00000 n Optimal Capital Structure with WACC (Operating Income held constant) Optimal Capital Stucture with WACC (Operating Income allowed to vary) Optimal Capital Structure with APV . 0000026049 00000 n | Capital structure practices/decisions assume vital significance in corporate financial management as they influence both return and risk of equity owners of corporate enterprises. This paper examines the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003. Problem Assignments and Solutions - Capital Structure 1) The corporate treasurer of Ajax Company expects the company to grow at 4% in the future, and debt securities at 6% interest (tax rate = 30%) to be a cheaper option to finance the growth. 0000033244 00000 n 0000008523 00000 n 0000005302 00000 n No. 0000014830 00000 n The proportion of debt to equity is a strategic choice for corporate managers. 0000003029 00000 n 0000018450 00000 n & 0000023226 00000 n 0000021548 00000 n 0000021184 00000 n 0000025762 00000 n 0000032242 00000 n 0000009910 00000 n Given the dramatic changes that have recently occurred in the economy, the topic of capital structure and corporate financing decisions is â¦ 0000032998 00000 n 0000021916 00000 n a) What is the market value of Kau Real Estate? 0000035699 00000 n 0000038214 00000 n The breakeven EBIT between the all-equity capital structure and Plan I is: EBIT/1,400 = [EBIT â.10($16,500)]/1,100 EBIT â¦ (Net present value analysis â total and incremental cost approach) c. a. 6��V]�>��s��}�qk��k��Z��>mg�=� ��g�"?�Ķ��X��~��`C֭�b��d$��3X�B��.Lg-�E<96v.�[*b'PTTĲ��M��$��'orl��!�K�/R"-�n\�v��`�``�� d�DQA8�|��yZX��5Cd5)��H��9��\v�;��%��vԳB�gĦh�e(83�� M`�y%+Fa�LljW��Kt�L|�t��I��J"Qmf�ա0b�c�^)�)��Dg�$�1�P�rc� Cp/�\9�h��. 0000024605 00000 n © 2003-2021 Chegg Inc. All rights reserved. Solutions to capital structure practice questions/problems, prepared by Pamela Peterson-Drake 1 Solutions to capital structure practice questions/problems 1. The corporate tax rate is 40%. 0000036768 00000 n 0000009261 00000 n Capital Investment Decisions Problems And Solutions Exercises Capital Investment Decisions Problems And Solutions Exercises When People Should Go To The Book Stores, Search Foundation By Shop, Shelf By Shelf, It Is In Reality Problematic. 0000024353 00000 n 0000013026 00000 n Capital Structure (Alternative Solutions) Note: Where appropriate, the \ï¬nal answer" for each problem is given in bold italics for those not interested in the discussion of the solution. 0000034202 00000 n 0000032098 00000 n Solutions to Capital Structure Problems 1. 0000011956 00000 n 0000038191 00000 n So how loâ¦ 0000020291 00000 n 0000011220 00000 n However, recent studies suggest that cost of debt falls with increase in the proportion of debt but it leads to an offsetting increase in cost of equity (due to higher distress costs associated with higher debt levels). 0000011431 00000 n 0000028927 00000 n 0000026693 00000 n 6.145 = PVIFA k%,10 yrs. Why might the proportion of equity to be used in your business Question 2 S&G Inc. is considering converting its all-equity capital structure â¦ 0000018736 00000 n An XYZ limited company looking to invest in one of the new project and cost of that project is $10,000 before investing company want to analyze that how long it will take a company to recovered invested money in a project? 0000006806 00000 n 0000016499 00000 n I. Formulas This section contains the formulas that you will need for this homework set: 1. The Firm's . Kau Real Estate Kau Real Estate Inc currently uses no debt. Operating income approach is the approach which suggests the decision of capital structure towards a firm is irrelevant and change in leverage or debt doesn't result in change of total and market price of the firm. The Weighted Average Cost of Capital (WACC): 0000022708 00000 n be limited when the business is first created. According to the scholars holding this view, the decisions regarding the form or composition of capital fall under the term âCapital Structureâ. 0000004967 00000 n company as company value and risk depends, at least in part, on its capital structure. 0000016537 00000 n EBDT)] The new machine cost is Rs 40,000 and its useful life (n) will be 4 years. 0000013996 00000 n
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