e15.1-e15.4

c. Due to market d. Changes in the bankruptcy code mall e The firm's sales and earnings become more volatile. 15-6 15-8 15-9 15-10 Why do public utilities generally use different capital structures than technology companies? Why is EBIT generally considered independent of financial leverage? Why miel EBIT actually be affected by financial leverage at high debt levels? Is the debt level that maximizes a firm's expected EPS the same as the debt level that maximizes its stock price? Explain. firm goes from zero debt to successively higher levels of debt, why would expect its stock price to rise first, then hit a peak, and then begin to decline? When the Bell System was broken up, the old AT&T was split into a new AT&T in addition to seven regional telephone companies. The specific reason for forcing the breakup was to increase the degree of competition in the telephone industry. AT&T had a monopoly on local service, long distance, and the manufacture of all equip. ment used by telephone companies; and the breakup was expected to open most of those markets to competition. In the court order that set the terms of the breakup. the capital structures of the surviving companies were specified and much attention was given to the increased competition telephone companies could expect in the future. Do you think the optimal capital structure after the breakup was the same as the pre-breakup optimal capital structure? Explain your position A firm is about to double its assets to serve its rapidly growing market. It must choose between a highly automated production process and a less automated one. It also must choose a capital structure for financing the expansion. Should the asset investment and financing decisions be jointly determined, or should each decision be made separately? How would these decisions affect one another? How could the leverage concept be used to help management analyze the situation? 15-11 production proces expansion. Shoich decision PROBLEMS Easy Problems den 3 BREAK EVEN ANALYSIS A CO BREAK-EVEN ANALYSIS A company's fixed operating costs are $500,000, its variable costs are $3.00 per unit, and the product's sales price is $4.00. What is the company's break-even point that is, at what unit sales volume will its income equal its costs OPTIMAL CAPITAL STRUCTURE Armada Transport is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is 15-2 Chapter 15 Capital Structure and Leverage 537 somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Debt Capital Projected Projected Stock Ratio EPS Price $3.20 3.45 $35.00 550 36.25 35.50 15-3 Assuming that the firm uses only debt and common equity, what is Armada's optimal capital structure? At what debt-to-capital ratio is the company's WACC minimized? RISK ANALYSIS a. Given the following information, calculate the expected value for Firm C's EPS Data for Firms A and B are as follows: E(EPS) = $5.10, and = $3.61; E(EPS) $4.20, and og $2.96. Probability 040 2 0.2 0.1 Firm A EPSA Firm B: EPS, Firm EPSC ($1.50) (1.20) (2.40) $1.80 1.50 135 $5.10 4.20 5.10 $8.40 6.90 8.85 1170 9.60 12.60 cap. Ruth read . You are given that oc firms' earnings. $4.11. Discuss the relative riskiness of the three ONLEVERED BETA Hicom Motors has $10 million in assets, which were financed with $2 million of debt and $8 million in equity. Hicom's beta is currently 1.2, and 15 tax rate is 40%. Use the Hamada equation to find Hicom's unlevered beta, bu FINANCIAL I narrrrrrr Nafi Dama and MAAKT are identical exent for 1-5