Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The companys EBIT was $120 million last year

Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The companys EBIT was $120 million last year and is not expected to grow. PizzaPalace is in the 25% state-plus-federal tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6 percent. The firm is currently financed with all equity, and it has 10 million shares outstanding.

When you took your corporate finance course, your instructor stated that most firms owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. If the company were to recapitalize, then debt would be issued, and the funds received would be used to repurchase stock. As a first step, assume that you obtained from the firms investment banker the following estimated costs of debt for the firm at different capital structures:

Percent Financed with Debt,

0%

20

8.0%

30

8.5

40

10.0

50

12.0

  1. Using the free cash flow valuation model, show the only avenues by which capital structure can affect value.

    • (1)

      What is business risk? What factors influence a firms business risk?

    • (2)

      What is operating leverage, and how does it affect a firms business risk? Show the operating break-even point if a company has fixed costs of $200, a sales price of $15, and variable costs of $10.

Using the mini case information, write a 250-500 word recommendation of the financial decisions you propose for this company based on an analysis of its capital structure and capital budgeting techniques. Explain why you chose this recommendation.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Handbook Of Energy Trading

Authors: Stefano Fiorenzani, Samuele Ravelli, Enrico Edoli

1st Edition

1119953693, 978-1119953692

More Books

Students also viewed these Finance questions

Question

Is there someone at work who encourages your development? P=258

Answered: 1 week ago

Question

1. At what stage are you in the family lifecycle?

Answered: 1 week ago