Complete four problems evaluating optimal capital structure and the financial health of a firm, addressing optimal capital structure, break-even analysis, WACC and optimal capital structure, and cost of trade credit and bank loan.
By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:
For this assessment, complete Problems 1–4 evaluating optimal capital structure and the financial health of a firm. You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet. In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer. Note the following:
XYZ Inc. is setting its target capital structure. The CFO of XYZ Inc. believes that the optimal debt-to-capital ratio is between 25 percent and 60 percent. Her staff derived following the projections. Various debt levels were considered.
Debt/Capital Ratio Projected EPS Projected Stock PriceDept/Capital RatioProjected EPSProjected Stock Price25%$4.20$40.0035%$4.45$41.5045%$4.75$41.2560%$4.50$40.59
Assuming that the firm uses only debt and common equity, what is XYZ's optimal capital structure? At what debt-to-capital ratio is the company's WACC minimized?
XYZ Inc. sells photoframes for $20 each. The fixed costs are $60,000, and variable costs are $7 per photoframe.
This problem is easiest to complete in Excel. Structure consists of only debt and common equity. XYZ's finance department staff created the following table showing the firm's debt cost at different debt levels:
Debt-to-Capital RatioEquity-to-Capital RatioDebt-to-Equity RatioBond RatingBefore-Tax Cost of Debt0.01.00.00A6.0%0.20.80.25BBB7.0%0.40.60.67BB9.0%0.60.41.50C11.0%0.80.24.00D14.0%
XYZ uses the CAPM to estimate its cost of common equity and estimates that the risk-free rate is 4 percent, the market risk premium is 7 percent, and its tax rate is 35 percent. XYZ estimates that if it had no debt, its "unlevered" beta would be 1.5.
XYZ Inc. buys $10 million of materials (net of discounts) on terms of 3/5, net 60, and it currently pays on the 5th day and takes discounts. XYZ plans to expand, which will mean additional financing.
By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:
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