Question
Capital structure is irrelevant under the conditions of perfect markets, demonstrate this point by showing that the weighted average cost of capital remains constant under
Capital structure is irrelevant under the conditions of perfect markets, demonstrate this point by showing that the weighted average cost of capital remains constant under various levels of debt. analyze relatively modest changes to Home Depot's capital structure. consider two scenarios: the firm issues $1 billion in new debt to repurchase stock, and the firm issues $1 billion in new stock to repurchase debt, and assuming a cost of unlevered equity(rU)of 12%.
the cost of debt capital rD may change with changes in leverage, for these modestly small changes, assume that rD remains constant. What is the relation between changing leverage and changing rD. What is the market D/E ratio in each of these cases? use the existing yield on the outstanding bond asrD.
1.Home Depot, Inc. (The) Common Stock (HD) Quote & Summary Data
The current stock price:$220.7927
Shares Outstanding:1,095,153,000
Coupon in %2.2766%Yield in %1.99%
Balance Sheet (values in 000's)Get Quarterly Data
Period Ending:
Trend
2/3/2019
1/28/2018
1/29/2017
1/31/2016
Current Assets
Cash and Cash Equivalents
$1,778,000
$3,595,000
$2,538,000
$2,216,000
Short-Term Investments
$0
$0
$0
$0
Net Receivables
$1,936,000
$1,952,000
$2,029,000
$1,890,000
Inventory
$13,925,000
$12,748,000
$12,549,000
$11,809,000
Other Current Assets
$890,000
$638,000
$608,000
$569,000
Total Current Assets
$18,529,000
$18,933,000
$17,724,000
$16,484,000
Long-Term Assets
Long-Term Investments
$0
$0
$0
$0
Fixed Assets
$22,375,000
$22,075,000
$21,914,000
$22,191,000
Goodwill
$2,252,000
$2,275,000
$2,093,000
$2,102,000
Intangible Assets
$0
$0
$0
$0
Other Assets
$847,000
$1,246,000
$1,235,000
$1,196,000
Deferred Asset Charges
$0
$0
$0
$0
Total Assets
$44,003,000
$44,529,000
$42,966,000
$41,973,000
Current Liabilities
Accounts Payable
$12,539,000
$11,628,000
$11,212,000
$10,531,000
Short-Term Debt / Current Portion of Long-Term Debt
$2,395,000
$2,761,000
$1,252,000
$427,000
Other Current Liabilities
$1,782,000
$1,805,000
$1,669,000
$1,566,000
Total Current Liabilities
$16,716,000
$16,194,000
$14,133,000
$12,524,000
Long-Term Debt
$26,807,000
$24,267,000
$22,349,000
$20,789,000
Other Liabilities
$1,867,000
$2,174,000
$1,855,000
$1,965,000
Deferred Liability Charges
$491,000
$440,000
$296,000
$379,000
Misc. Stocks
$0
$0
$0
$0
Minority Interest
$0
$0
$0
$0
Total Liabilities
$45,881,000
$43,075,000
$38,633,000
$35,657,000
Stock Holders Equity
Common Stocks
$89,000
$89,000
$88,000
$88,000
Capital Surplus
$10,578,000
$10,192,000
$9,787,000
$9,347,000
Retained Earnings
$46,423,000
$39,935,000
$35,519,000
$30,973,000
Treasury Stock
($58,196,000)
($48,196,000)
($40,194,000)
($33,194,000)
Other Equity
($772,000)
($566,000)
($867,000)
($898,000)
Total Equity
($1,878,000)
$1,454,000
$4,333,000
$6,316,000
Total Liabilities & Equity
$44,003,000
$44,529,000
$42,966,000
$41,973,000
2.Compute the market D/E ratio for Home Depot. Approximate the market value of debt by the book value of net debt; include both Long-Term Debt and Short-Term Debt/Current Portion of Long-Term Debt from the balance sheet and subtract any cash holdings. Use the stock price and number of shares outstanding to calculate the market value of equity.
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International financial management
Authors: Jeff Madura
13th edition
978-1337099738, 1337099732, 9781337515894, 1337515892, 978-1337587211
