Download Free PDF. After deciding the quantum of funds required it should be decided which type of securities should be raised. Capital Structure Questions and Answers Test your understanding with practice problems and step-by-step solutions. ... costs, capital structure is irrelevant. Course Hero is not sponsored or endorsed by any college or university. First, although it is not clear whether they should be considered debt, non-financial liabilities should never be considered as equity. Kau Real Estate Kau Real Estate Inc currently uses no debt. EBIT is expected to be $6,000 forever and the cost of capital is currently 12%. Capital Structure job interview questions and answers guide. Capital Structure [CHAP. The timeline looks like this: R = 5.5% 012 3 (10,000) 2,000 3,000 5,000 Present values (10,000) 1,896 2,695 4,258 Solution: Illustration 3: 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. a) What is the market value of Kau Real Estate? If there is a strong expansion in the economy, then EBIT will be 30% higher. Alternative 1 debt ratio = 0.25 Alternative 2 debt ratio = 0.67 b. leverage chapter problem solution 1. c. $67,500 DFL 1.93 $6,000 $67,500 $22,500 1 Solutions to Capital Structure Problems 1. 300 per share, calculate the market value weighted average cost of capital assuming that the market values and book values of the debt and preference capital are same. Solutions to capital budgeting practice problems Capital budgeting and cash flows 1. Solutions to capital structure practice questions/problems, prepared by Pamela Peterson-Drake 2 5. a. Balance Sheet Assets Liabl & OE Operating Assets $30,0000 Equity $30,000 Value of the operating assets: EBIT ( 1 – … c. The capital structure is 75% debt and 25% internal equity. The one who provides the best Capital Structure answers with a perfect presentation is the one who wins the interview race. Solutions to Problems . 2. Continuing illustration 19, it the firm has 18,000 equity shares of Rs. Yet, the common financial-debt-to-asset ratio (FD/AT) measure of leverage commits exactly this mistake. CAPITAL STRUCTURE SOLUTIONS TO ASSIGNMENT PROBLEMS Problem No.1 Evaluation of different capital structures given in the problem: working capital will have to be ascertained. Before tax cost of debt is 12.5 % and tax rate is 20%. 1. Alternative 1 Alternative 2 Income to claimant s $30,000 $30,000 Debt owners $10,000 $20,000 Equity owners $20,000 $10,000 c. Alternative 1 Alternative 2 EBIT and Leverage Money Inc., has no debt outstanding and a total market value of $150,000. EBIT is expected to be $6,000 forever and the cost. Browse through all study tools. breaks down, the solution is: n To choose a different mechanism for corporate governance ... or a family the problem is exacerbated. No. Earnings before interest and taxes [EBIT] are projected to be $14,000 if economic conditions are normal. ... to people concerned with capital structure decisions. Solutions to Capital Budgeting Practice Problems 1. With the information given, we can find the cost of equity using the dividend growth model. Learn Capital Structure and get preparation for the job of Capital Structure. Which of the following statements is most correct? Deciding capital structure: Capital structure refers to kind and proportion of different securities for raising funds. Briefly explain the terms, "capital structure" and "optimal capital structure". the problem of capital structure. Comments. ... steps are included in this solutions manual, rounding may appear to have occurred. Solution – 4 (Problem related to find out missing item) Notes: In this problem available information is not enough to solve ratios asked so that need to prepare Trading Account to identify values which are not given in the question. EBIT is expected to be $6,000 forever and the cost of capital is currently 12%. Capital Structure Problems-Solutions.pdf - Solutions to Capital Structure Problems 1 Kau Real Estate Kau Real Estate Inc currently uses no debt EBIT is, 5 out of 5 people found this document helpful. Problem 3. Determining the Capital structure, Theories of Capital Structure; Cost of Capital: Significance of Cost of Capital, Computation of Cost of Capital, EPS, EBIT Analysis; Dividend Policy ... Financial Management: Text and Problems by M Y Khan & P K Jain, Publisher: TMH, New Delhi. Note: Perfect capital markets - no taxes, no transaction costs, no bankruptcy costs, Using this model, the cost of equity is: RE = [$3.40(1.045) / $53] + .045 RE = .1120, or 11.20% 2. Capital Structure Questions: Problem 1, page 80 in the class packet. Download PDF. Here we have information to calculate the cost of equity using the CAPM. I. Formulas This section contains the formulas you might need for this homework set: 1. 15 & 16] -2 II. Chapter 12 Leverage and Capital Structure Solution to Problems P12-1. 8Capital Structure Theories Choose capital structure that minimizes cost of capital which in turn maximizes stock price There are three theories on choosing the optimal capital structure Independence Theory Dependence Theory Moderate Theory For all theories, will use a simple valuation model: D where: P0 = price of stock P0 = kc D = constant dividend Kc = cost of equity capital 1. Basic . Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Capital Structure & Firm Value WITHOUT Taxes A. Modigliani and Miller Proposition I [without taxes] The value of the firm is unaffected by its choice of capital structure under perfect capital markets. Basic 1. a. 7.9 Illustrative Solved Problems 7.10 Answers to ‘Check Your Progress’ 7.11 Questions and Exercises 7.0 INTRODUCTION Given the capital budgeting decision of a firm, it has to decide the way in which the capital projects will be financed. LG 1: Breakeven point–algebraic . Share. Students also viewed. Solution - Capital Structure.pdf. University. The $5 million is a sunk cost: whether or not the firm goes ahead with the new product, the $5 million has been spent. g ntmasterminds.com 5. Kau Real Estate Kau Real Estate Inc currently uses no debt. Monash University. LG 1: Breakeven Point–Algebraic Basic FC Q (P VC) $12,350 Q 1 ($24.95 $15.45) = − = = − ,300 P12-2. 9 1. If Kau floats $20,000 debt at 8% and uses proceeds to repurchase stock what is the. This paper points out two common problems in capital structure research. Aswath Damodaran 16 Problems in the Theory of Optimal Capital Structure - Volume 1 Issue 2 - Alexander A. Robichek, Stewart C. Myers Skip to main content Accessibility help We use cookies to distinguish you from other users and to provide you with a better experience on our websites. An increase in the rate of depreciation will cause the … 100 each outstanding and the current market price is Rs. U(Ãm™çéöÕ{DÌcQšôªh­•æÂ[Š�VÇ•üi˜"¬&÷É3 Ô\1ˆ …*Ÿ(š@RXŠÃì"3êñš›¼Nj¸±N½pÛ(9�ÂP˜Ï•éóÊÔ€ÂÇXT¡]¹€¦t� \«sB3» Œz D¢4ùã(xC‰„t©„”HÄ�Kz@áLŞ ®�r0±|×µ.†iào΃®†°BÅPöÃãNQñ&+Ø�L1‰++İÀJêµ.F">Y. The corporate tax rate is 40%. Solutions to Questions and Problems 1. Financial Management (BFW2631) Academic year. Purpose of this study is to review various capital structure theories that have been... | … Solution (a) Forecast of working capital of Dowell Ltd (A) Current assets: TABLE 13 .132 Statement showing determination of net working capital (A) Current assets: TABLE 13 .1310 Projected profitability statement at 80 per cent level of capacity (48,000 packets) Sales revenue (48,000 × Rs 12) Rs 5,76,000 Less: Cost of sales: Raw material (48,000 × Rs 4) Rs 1,92,000 … M /s Nagu Ltd., has a share capital of $ 1,00,000 divided into 10,000 equity sharp-s of $ 10 each fully paid. Capital Structure (Alternative Solutions) Note: Where appropriate, the \flnal answer" for each problem is given in bold italics for those not interested in the discussion of the solution. b. Technology for modification of the balance sheet positions of the company; Second. P11-1. 2014/2015. The corporate tax rate is 40%. Balance Sheet Assets Liabl & OE Operating Assets $30,0000 Equity $30,000 Value of the operating assets: EBIT ( 1 – tax rate) / … FC (VC) $12,350 1,300 ($24.95 $15.45) Q P Q = ... Chapter 11 Leverage and Capital Structure 225 . If they had 2,000 shares OS, What is the price before and after. The cost structure for the company’s product, for the above mentioned activity level is detailed below. However, the final answer for each problem is found without rounding during any step in the problem. Questions on Capital Structure Optimal capital structure Answer: e Diff: E 1. Company estimates that its WACC is 12%. PDF | Despite a vast literature on the capital structure of the firm there still is a big gap between theory and practice. Add New Question. Kau Real Estate Inc currently uses no debt. n The value of a firm is independent of its debt ratio. What is the total wealth of a shareholder who owned 10 shares originally, but sold 5. From the data calculate : (i) Gross Profit Ratio (ii) Net Profit Ratio (iii) Return on Total Assets (iv) Inventory Turnover (v) Working Capital Turnover (vi) Net worth to Debt Therefore within the range of the research, we identify four separate group of problems in the field of applied capital optimisation which require precise financial and investment circumstances and appropriate solutions. 2. Capital structure questions and answers on topics like capital structure, principles of capital structure management, internal & external factors affecting capital structure. What is the market value of Kau Real Estate? Answer: Capital Structure: The mix (or proportions) of long-term financing sources: debt, preferred stock and common stock. Helpful? The management of G Ltd has called for a statement showing the working capital needed to finance a level of 3,00,000 units of output for the year. Every time the firm makes an investment decision, it is at the same time making a financing decision also. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS. Course. a) What is the market value of Kau Real Estate? Problem Assignments and Solutions – Capital Structure. It has a major expansion programme requiring an investment of another $ 50,000. 2. PDF | Capital structure is still a puzzle among finance scholars. Solutions to Capital Structure Problems 1. Capital structure decisions A case study on high growth SMEs listed on NGM Equity in Sweden ... given us advice on solutions and who has strongly motivated us through the whole process. This preview shows page 1 - 3 out of 11 pages. It may be wise to finance fixed assets through long term debts. IPCC_33e_Costing_Capital Structure_Assignment Solutions_____32 Ph: 98851 25025/26 www. Please sign in or register to post comments. The optimal capital structure simultaneously maximizes EPS and minimizes the WACC. Problems Relating to Capital Structure and Leverage 1.