Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please help. I need an essay with a minimum of 250-500 words. WITH REFERENCES. Please ANSWER ALL QUESTIONS with complete sentences. I will not use

image text in transcribed

Please help. I need an essay with a minimum of 250-500 words. WITH REFERENCES. Please ANSWER ALL QUESTIONS with complete sentences. I will not use your words verbatim.

Thank you for your help! Please send back in WORD DOCUMENT

image text in transcribed Assume you have just been hired as a business manager of Pizza Palace, a regional pizza restaurant chain. The company's EBIT was $50 million last year and is not expected to grow. 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. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures: If the company were to recapitalize, then debt would be issued and the funds received would be used to repurchase stock. Pizza Palace is in the 40% state-plusfederal corporate tax bracket, its beta is 1.0, the risk-free rate is 6%, and the market risk premium is 6%. a. Using the free cash flow valuation model, show the only avenues by which capital structure can affect value. b. (1) What is business risk? What factors influence a firm's business risk? (2) What is operating leverage, and how does it affect a firm's 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. Assume you have just been hired as a business manager of Pizza Palace, a regional pizza restaurant chain. The company's EBIT was $50 million last year and is not expected to grow. 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. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures: Percent Financed with Debt, wd 0% 20 30 40 50 rd 8.0% 8.5 10.0 12.0 If the company were to recapitalize, then debt would be issued and the funds received would be used to repurchase stock. Pizza Palace is in the 40% state-plusfederal corporate tax bracket, its beta is 1.0, the risk-free rate is 6%, and the market risk premium is 6%. a. Using the free cash flow valuation model, show the only avenues by which capital structure can affect value. b. (1) What is business risk? What factors influence a firm's business risk? (2) What is operating leverage, and how does it affect a firm's 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

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

Step: 3

blur-text-image

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

Financial Management Core Concepts

Authors: Raymond Brooks

4th Edition

134730417, 134730410, 978-0134730417

More Books

Students also viewed these Finance questions