Question
Orion is a small company listed in the stock market that until now is funded exclusively...
Orion is a small company listed in the stock market that until now is funded exclusively by common equity. You recently had a meeting with the financial director where you discussed the possibility of using other financing sources than common equity. He then invited you to take some time and work on this case. Orion's data is as follows: The total value of the company today is €5,000,000. 2. The company may obtain long-term loans at the rate of 8%. 3. The company may issue preferred shares with a compulsory dividend of 10% of their value. The company may issue common shares at a price of €2.5 per share. The company's annual earnings before interest and taxes are expected to be €600,000 6. The corporate tax rate is 20%. You have thought of presenting the following three possible financing plans (according to which €5,000,000 are allocated): Plans Debt Preferred Stock 20% Common Equity 80% 40% 20% 40% 20% Answer the following questions. a. You would like to make a brief introduction to the theory of capital structure and present it to the financial manager. Briefly refer to the various theories mentioned in this field (approximately 500 words). (10 ) b. Calculate the earnings per share (EPS) that correspond to each of the three (3) plans Which of the three alternative plans would you suggest according to the data available to you, using the EBIT-EPS analysis to support your answer? (100) c. Diagrammatically investigate the relationship between Earnings before interest and taxes (EBIT) and Earnings per Share (EPS) for the three alternative plans and comment on the conclusions drawn from the chart. Discuss which plan is preferable at the different EBIT levels? (10)
Answers
1. Capital Structure is the composition of capital elements viz., Debt, Equity and Preference. the theories of capital structure are concerned with having an optimum capital structure and derive maximum profits. Ideally there are 4 theories:
- Traditional Approach: It is a simple theory that emphasizes on Optimum Capital Structure. A capital proportion which costs minimum and generates a maximum wealth.
- Net income Approach: According this, when the debt proportion in capital structure increases, the weighted cost of capital comes down. Thus increasing the value of the firm.
- Net Operating Income Approach: This is the opposite to the Net Income Approach. According to this market analyses the company as a whole regardless of the debt and equity proportions, thus WACC remains constant.
- Modiglani Miller Approach: According to this the value of the firm is discounted value of the future cashflows. It has got nothing to do with debt-equity proportion.
2.
A B C EBIT 600000 600000 600000 Less: Interest @ 8% 80000 160000 200000 EBT 520000 440000 400000 Taxes @ 20% 104000 88000 80000 EAT 416000 352000 320000 Less: Pref dividend @ 10% 0 100000 150000 EAT to equity (A) 416000 252000 170000 No of Shares (B) 1600000 800000 400000 EPS (A/B) 0.26 0.32 0.43 3. Since Plan C gives the highest EPS it is preferable.
Similar Solved Questions
1 answers
How do you find the derivative of #sin^2(x)#?
How do you find the derivative of #sin^2(x)#?...
1 answers
1. Suppose nominal GDP is S99,000 and the GDP deflator is 110. Real GDP is: A...
1. Suppose nominal GDP is S99,000 and the GDP deflator is 110. Real GDP is: A $90,000 B $108,900 C $10,890,0 D $900 PRESS APPLY ON PAPER...
1 answers
A person holds a 1.26 N baseball in his hand, a distance of 34.0 cm from...
A person holds a 1.26 N baseball in his hand, a distance of 34.0 cm from the elbow joint, as shown in the figure(Figure 1). The biceps, attached at a distance of 2.75 cm from the elbow, exerts an upward force on the forearm. Consider the forearm and hand to be a uniform rod with a mass of 1.40 kg . ...
1 answers
A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a...
A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $4,000. Each year after that, you will receive a payment on the anniversary of the last payment that is 2% larger than the last payment. This pattern of payments will go on forever. Assume tha...
1 answers
Last month Stagecoach Company had a $64,000 loss on sales of $320,000. Fixed costs are $150,000...
Last month Stagecoach Company had a $64,000 loss on sales of $320,000. Fixed costs are $150,000 a month. What sales revenue is needed for Stagecoach to break even? Multiple Choice $540,000 $460.000 $750,000 $420,000...
1 answers
On October 1 of the current year, B's employer provided her with the use of a...
On October 1 of the current year, B's employer provided her with the use of a car. The car was purchased for $45,000 (including tax). The employer will also pay for the operating expenses that are expected to be $2,600 annually. B will drive the car 1,500 km per month of which 300 km will be for...
1 answers
You are a nurse in the ICU at a dmall, remote borthern hospital and you wonder...
You are a nurse in the ICU at a dmall, remote borthern hospital and you wonder about the care of patients with head injuries. You are wondering if elevating the head of the bed 30 degrees will reduce intracranial pressure and improve patient outcomes write a focused question (PICOC)...
1 answers
Are the eco-promises that companies communicate about their products and services helpful example( consumers can make...
are the eco-promises that companies communicate about their products and services helpful example( consumers can make better decisions) worth the time and financial investment?...
1 answers
Question 10 Not yet answered a) In your own words, explain what is happening the markets...
Question 10 Not yet answered a) In your own words, explain what is happening the markets right now. Be specific and point to at least two causes and two effects. Marked out of b) What should you do when the market experiences the extreme volatility we are seeing now? 6.00 Flag question = Us Yy2...
1 answers
HIS LUGDUI. TOP Find the area of the specified region. Shared by the circles r =...
HIS LUGDUI. TOP Find the area of the specified region. Shared by the circles r = 2 and r = 4 sin OA. ? / (48-313) OB. 21 oc. ? //22 + 3/3) Click to select your answer Type here to search...
1 answers
Please provide the full code...the skeleton is down below: Note: Each file must contain an int...
Please provide the full code...the skeleton is down below: Note: Each file must contain an int at the beginning, stating the number of records in the file. Afterwards, the number of records in the file will follow. Each record that follows will consist of a last name (String), and a gpa (double). Ho...
1 answers
Applying Overhead in a Service Company: Journal Entries (L04, LOS, LOB] Vista Landscaping uses a job-order...
Applying Overhead in a Service Company: Journal Entries (L04, LOS, LOB] Vista Landscaping uses a job-order costing system to track the costs of its landscaping projects The company provides garden design and installation services for its clients. The table below provides data concerning the three la...
1 answers
In C++ l. Assume that a system has a 32-bit virtual address with a 4-KB page...
In C++ l. Assume that a system has a 32-bit virtual address with a 4-KB page size. Write a program that is passed a virtual address (in decimal) on the command line and have it output the page number and offset for the given address. As an example, your program would run as follows: yourprogram 1998...
1 answers
System modelling
(please help)pneumatic valve is maintaining pressure Pi(t) to the system in order to control the flow rate of the gas entering the pressure tank as indicated in the figure. Due to the pressure, a force F(t) is applied to the valve plug having mass of m, stiffness of K and Coloumb friction of B...
1 answers
Which of the following binary solutions of volatile liquids have negative deviation?
#A)# chloroform and acetone #B)# chlorobenzene and bromobenzene #C)# benzene and toluene #D)# hexane and heptane...
1 answers
Your job is to write a program that will help us keep track of the donations to these candidates....
Help with C++ Code (using visual studio) preferred Typed Result: Your job is to write a program that will help us keep track of the donations to these candidates. You will assume that the program is written for this election where Anders and Valerie are running. It is OK to hard code these into yo...
1 answers
Kindly answer the questions with work. Thank you During the first calendar quarter of 2016, Clinton...
Kindly answer the questions with work. Thank you During the first calendar quarter of 2016, Clinton Corporation is planning to manufacture a new product and introduce it in two regions. Market research indicates that sales will be 8,000 units in the urban region at a unit price of $53 and 7,000 unit...
1 answers
Answer the following questions 38. In which quadrant is the terminal side of a 455 angle?...
Answer the following questions 38. In which quadrant is the terminal side of a 455 angle? 39. In which quadrant is the terminal side of a -135° angle 40. Which of the angles is coterminal with an 80° angle? a. 440 b. 280 c.-160 d. -85 41. Convert-270 to radian measure. 42, write the equatio...
1 answers
All that is needed is to fill in that one area that says "Student provides missing...
All that is needed is to fill in that one area that says "Student provides missing code to compare computed hammingCode[] bits to the codeword[] bits to determine the incorrect bit." in the code below. THAT IS ALL THAT IS NEEDED PLUS SCREENSHOT OF COMPILED OUTPUT AFTERWARDS. Please TAKE SCRE...