Exam 14: Capital Structure Management in Practice

Alace is an all equity firm with 10 million shares outstanding that is evaluating two alternative financing plans.With the first plan, Alace will sell 1 million shares of common stock at $15 each.Under the second plan, the firm would sell $15 million of 12 percent long-term debt.If Alace has a marginal tax rate of 35 percent, what is the EBlT-EPS indifference point?

In the analysis of financial leverage, all of the following are referred to as fixed charges except:

The degree of financial leverage is defined as the percentage change in

List the five steps developed to assist financial managers in making capital structure decisions.

Why does a firm use operating and financial leverage? In what ways does it help the firm, in what ways does it hurt the firm?

In considering EBIT-EPS analysis, which of the following statements is/are correct?

Two companies, Jefferson and Jackson, are virtually identical in all aspects of their operations except that the two companies differ in their capital structures, as shown below: Both companies have $500 million in total assets and both have a 40% marginal tax rate.What is the EPS for Jefferson at an EBIT level of $50 million?

The percentage change in a firm's EBIT that results in a 1% change in sales or output is known as the

In EBIT-EPS analysis, the indifference point is found at the point where for the two alternative financing plans are equal.

An analytical technique called can be used to help determine when debt financing is advantageous and when equity financing is advantageous.

Cash insolvency analysis evaluates the adequacy of a firm's cash position in a

Suppose that ITC's degree of combined leverage (DCL) is 3.00 at a sales volume of $9 million.Determine ITC's percentage change in earnings per share (EPS) if forecasted sales increase by 20 percent to $10,800,000.

Kermit's Hardware's (KH) fixed operating costs are $20.8 million and its variable cost ratio is 0.30.The firm has $10 million in bonds outstanding with a coupon interest rate of 9%.KH has 200,000 shares of common stock outstanding.The firm has revenues of $32.2 million and its marginal tax rate is 40%.Compute KH's degree of operating leverage.

Illinois Tool Company's (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70.The firm has $3,000,000 in bonds outstanding at an interest rate of 8 percent.ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding.ITC is in the 50 percent corporate income tax bracket.Forecasted sales for next year are $9 million.What is ITC's degree of combined leverage at a sales level of $10 million?

Archive Storage earned $3.20 a share on sales of $13.6 million.Archive has determined that its degree of operating leverage is 1.87 and its degree of financial leverage is 2.91.If sales are expected to increase 15%, what will be the EPS forecast?

The Albany Corporation has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8%).The company is planning a major expansion and is undecided between two financing plans. Plan A: Equity financing.Under this plan, an additional 2.5 million shares of common stock will be sold at $15 each. Plan B: Debt financing.Under this plan, $37.5 million of 10% long-term debt will be sold. What is the EBIT-EPS indifference point? Assume a 40 percent marginal tax rate.

The use of increasing amounts of combined leverage the risk of financial distress.

Kenzel has an EPS of $4.20 and sales are $9 million.If the firm has a degree of operating leverage of 4.0 and a degree of financial leverage of 5.2, forecast EPS if the firm expects a 4% sales decline.

The Albany Corporation has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8%).The company is planning a major expansion and is undecided between two financing plans. Plan A: Equity financing.Under this plan, an additional 2.5 million shares of common stock will be sold at $15 each. Plan B: Debt financing.Under this plan, $37.5 million of 10% long-term debt will be sold. What happens to the EBIT indifference point if the interest rate on the new debt decreases and the common stock price remains constant?

Sulzar's capital structure consists only of common stock (20 million shares), but the firm is planning a major expansion which will require $100 million of new capital.Sulzar has a choice of obtaining the needed capital through the sale of 5 million shares of common stock at $20 per share or the sale of $100 million of first mortgage bonds that would have a coupon rate of 9%.If Sulzar has a marginal tax rate of 40%, calculate the EBIT-EPS indifference point.