MGFC10H3 Study Guide - University Of Toronto Scarborough, Capital Structure, Cash Flow

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scarletprairie-dog877

12 Dec 2014

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Review problems with solutions on capital structure policy. Drexler & fraser corporation (dfc) and fazilah & rania limited (frl) are identical firms in all respects except for their capital structure. Dfc is all equity financed with ,000,000 in stock. Its stock is worth ,000,000 and the interest rate on its debt is 10%. Ignore taxes: gloria kok owns ,000 worth of frl"s stock. Jeffrey hui & nick simos manufacturing (jhnsm) has an expected ebit of ,330 in perpetuity, a tax rate of 40%, and debt/equity ratio of 0. 70. Andrew radu & melanie hague limited (armh) will remain in business for one more year. The estimated probability of a boom year is 70% and that of recession is 30%. Armh will have total cash flow of million in a boom year and million in recession. Its required debt payment is million at the year end.

Related Questions

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 10 percent. Both firms expect EBIT to be $97,000. Ignore taxes.

part a: Rico owns $80,000 worth of XYZâs stock. What rate of return is he expecting?

part b:

Suppose Rico invests in ABC Co. and uses homemade leverage. Calculate his total cash flow and rate of return

part c:

What is the cost of equity for ABC and XYZ?

part d:

What is the WACC for ABC and XYZ?

chocolatefox949

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $600,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $300,000 and the interest rate on its debt is 4.5 percent. Both firms expect EBIT to be $67,000. Ignore taxes.

a. Richard owns $36,000 worth of XYZâs stock. What rate of return is he expecting?

b. Suppose Richard invests in ABC Co. and uses homemade leverage to match his cash flow in part a. Calculate his total cash flow and rate of return.

c. What is the cost of equity for ABC and XYZ?

d. What is the WACC for ABC and XYZ?

jadebeetle403

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $875,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $437,500 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $91,000. Ignore taxes.

a. Rico owns $87,500 worth of XYZâs stock. What rate of return is he expecting?

b.	Suppose Rico invests in ABC Co. and uses homemade leverage. Calculate his total cash flow and rate of return. (Do not round intermediate calculations. Enter your rate of return answer as a percent rounded to 2 decimal places, e.g., 32.16.)


Total cash flow	$
Rate of return	%

What is the cost of equity for ABC and XYZ?

d.	What is the WACC for ABC and XYZ?

MGFC10H3 Study Guide - University Of Toronto Scarborough, Capital Structure, Cash Flow

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