Green Foods currently has $200,000 of equity and is planning an $80,000 expansion to meet increasing demand for its product. Thecompany currently earns $50,000 in net income, and the expansion will yield $25,000 in additional income before any interestexpense.The company has three options: (1) do not expand, (2) expand and issue $80,000 in debt that requires payments of 8% annual interest,or (3) expand and raise $80,000 from equity financing. For each option, compute (a) net income and (b) return on equity (Net Income +Equity). Ignore any income tax effects. (Round "Return on equity" to 1 decimal place.)1 Don't Expand2 Debt Financing 3 Equity FinancingIncome before interest expenseInterest expenseNet incomeEquityReturn on equity%

Financing refers to the process of raising funds for the business operations like purchasing,…

Answered: Income before interest expense Interest…

Income before interest expense Interest expense Net income Equity Return on equity 1 Don't Expand equity" to 1 decimal place.) 2 Debt Financing 3 Equity Financing come

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

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Green Foods currently has $500,000 of equity and is planning an $200,000 expansion to meet increasing demand for its product. The company currently earns $175,000 in net income, and the expansion will yield $87,500 in additional income before any interest expense. The company has three options: (1) do not expand, (2) expand and issue $200,000 in debt that requires payments of 9% annual interest, or (3) expand and raise $200,000 from equity financing. For each option, compute (a) net income and (b) return on equity (Net Income ÷ Equity). Ignore any income tax effects. (Round "Return on equity" to 1 decimal place.)
Green Foods currently has $550,000 of equity and is planning an $220,000 expansion to meet increasing demand for its product. The company currently earns $110,000 in net income, and the expansion will yield $55,000 in additional income before any interest expense. The company has three options: (1) do not expand, (2) expand and issue $220,000 in debt that requires payments of 13% annual interest, or (3) expand and raise $220,000 from equity financing. For each option. compute (a) net income and (b) return on equity (Net Income - Equity). Ignore any income tax effects Note: Round "Return on equity" to 1 decimal place. 1 Don't Expand 2 Debt Financing 3 Equity Financing Income before interest expense Interest expense Net income Equity Return on equity
The Alpha Beta Company is attempting to establish a current assets policy. Fixed assets are $700,000, and the firm plans to maintain a 40% debt-to-assets ratio. Alpha Beta has no operating current liabilities. The interest rate is 12% on all debt. Three alternative current asset policies are under consideration: 30%, 40%, and 70% of projected sales. The company expects to earn 18% before interest and taxes on sales of $5 million. Alpha Beta’s effective federal-plus-state tax rate is 30%. What is the expected return on equity under each asset policy?
No-Toxic-Toys currently has $200,000 of equity and is planning an $80,000 expansion to meet increasing demand for its product. The company currently earns $50,000 in net income, and the expansion will yield $25,000 in additional income before any interest expense. The company has three options: (1) do not expand, (2) expand and issue $80,000 in debt that requires payments of 8% annual interest, or (3) expand and raise $80,000 from equity financing. For each option, compute (a) net income and (b) return on equity (Net income ÷ Equity). Ignore any income tax effects.
Hunter Corporation expects an EBIT of $30,000 every year forever. The company currently has no debt and its cost of equity is 14 percent. The tax rate is 20 percent. The company is able to borrow at 8 percent. What will the value of the company be if it takes on debt equal to 60 percent of its levered value? [Note: the proceeds from issuing new debt are used to repurchase Hunter’s equity.] Group of answer choices $251,488.1 $171,428.6 $274,285.8 $194,805.2
Juicers Inc. is thinking of acquiring Fast Fruit Company. Juicers has determined that Fast Fruit's current cost of equity is 17.5%; Fast Fruit currently has no debt outstanding. In Year 1, Juicers expects Fast Fruit to generate $9 million in NOPAT and invest $50 million in total net operating capital. Fast Fruit will borrow to finance this expansion, with the first interest payment ($5 million) due at Year 2. (There will be no interest due at Year 1.) In Year 2, Fast Fruit will generate $25 million in NOPAT and invest $10 million in total net operating capital. Fast Fruit's marginal tax rate is 25%. After the second year, the free cash flows and the tax shields each will grow at a constant rate of 4%. Assume that all cash flows occur at the end of the year. If Juicers must pay $90 million to acquire Fast Fruit, what is the NPV of the proposed acquisition?
Juicers Inc. is thinking of acquiring Fast Fruit Company. Juicers has determined that Fast Fruit's current cost of equity is 17.5%; Fast Fruit currently has no debt outstanding. In Year 1, Juicers expects Fast Fruit to generate $9 million in NOPAT and invest $50 million in total net operating capital. Fast Fruit will borrow to finance this expansion, with the first interest payment ($5 million) due at Year 2. (There will be no interest due at Year 1.) In Year 2, Fast Fruit will generate $25 million in NOPAT and invest $10 million in total net operating capital. Fast Fruit's marginal tax rate is 25%. After the second year, the free cash flows and the tax shields each will grow at a constant rate of 4%. Assume that all cash flows occur at the end of the year. If Juicers must pay $90 million to acquire Fast Fruit, what is the NPV of the proposed acquisition? (Report your answer in millions of dollars.)
Sun Minerals, Inc., is considering issuing additional long-term debt to finance an expansion. Currently, the company has $50 million in 12 percent debt outstanding. Its after-tax net income is $12 million, and the company is in the 40 percent tax bracket. The company is required by the debt holders to maintain its times interest earned ratio at 3.7 or greater. Do not round intermediate calculations. a. What is the present coverage (times interest earned) ratio? Round your answer to one decimal place. times b. How much additional 12 percent debt can the company issue now and maintain its times interest earned ratio at 3.7? (Assume for this calculation that earnings before interest and taxes remain at their present level.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million c. If the interest rate on additional debt is 14 percent, how much unused "debt capacity" does the company…
Trower Corp. has a debt−equity ratio of .80. The company is considering a new plant that will cost $103 million to build. When the company issues new equity, it incurs a flotation cost of 7.3 percent. The flotation cost on new debt is 2.8 percent. What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to the nearest whole dollar, e.g., 1,234,567.) Initial cash outflow $ What is the initial cost of the plant if the company typically uses 55 percent retained earnings? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to the nearest whole dollar, e.g., 1,234,567.) Initial cash outflow $ What is the initial cost of the plant if the company typically uses 100 percent retained earnings? (Enter your answer in dollars, not millions of dollars. Do not round…
ABC SAOG needs RO. 5 million for the installation of a new factory. The new factory expects to yield annual Earnings Before Interest and Tax (EBIT) of RO. 600,000. In choosing a financial plan, ABC SAOG has an objective of maximizing earnings per share (EPS). The company proposes to issue ordinary shares and raise the debt of RO. 500,000, RO. 1,500,000 or RO. 2,000,000. The current market price per share is RO. 350 and is expected to drop to RO. 150 if the funds are borrowed in excess of RO. 1,800,000. Funds can be borrowed at the following rates: Up to RO. 500,000 at 7% Over RO. 500,000 to RO. 2,000,000 at 9% Over RO. 2,000,000 at 14% Assuming a tax rate of 40%, advise the company.
Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.88. It's considering building a new $39 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $8.5 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 10% of the amount raised. The required return on the company's new equity is 14%, 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of…
maze Inc is unlevered with firm value at $640,000. maze is currently deciding whether including debt in its capital structure would increase its value. the current of cost equity is 12%. if maze issue $300,000 in new debt with an 8% interest rate. the equity after debt insurance is $442,000 and the effective marginal tax bracket is 34%. what will new firm value and the new cost of equity?