Question 3 (5marks) UNIT 4: CAPITAL STRUCTURE THEORY AND POLICY a) Crown Data(CD) has a current capital structure that consists of $120 million in commo n equity ( 15 million shares) and $80 million in long- CORPORATE FINANCE DUE: NOVEMBER 13, 2022 term debt with an average interest rate of 11%. CD is considering an expansion project that will cost $22 million. The project will be financed either by issuing longterm debt at a cost of 12.5%, or the sale of new common stock at $35 per share. The firm's marginal tax rate is 40%. What is the EBIT indiff erence point between the two financing options? (2 marks) b) TCA Cable has fixed operating costs of $2.6 million, and its variable cost ratio is 0.30. TCA has $4.0 million in bonds outstanding with a coupon interest rate of 12%. TCA has 1.0 million common shares and 1,000,000 shares of $1.75 preferred stock outstanding. Total revenues for TCA Cable are $14.2 million. If TCA has a marginal tax rate of 40%, what is its degree of combined leverage? (1 marks) c) Biotec has estimated the costs of debt and equity capital for various proportions of de bt in its capital structure: If Biotec pays a current dividend of $1.00 and expects dividends to grow at a constant rate o f 7%, what is Biotec's stock price if it obtains its optimal capital structure? (2 marks) Question 3 (5marks) UNIT 4: CAPITAL STRUCTURE THEORY AND POLICY a) Crown Data(CD) has a current capital structure that consists of $120 million in commo n equity ( 15 million shares) and $80 million in long- CORPORATE FINANCE DUE: NOVEMBER 13, 2022 term debt with an average interest rate of 11%. CD is considering an expansion project that will cost $22 million. The project will be financed either by issuing longterm debt at a cost of 12.5%, or the sale of new common stock at $35 per share. The firm's marginal tax rate is 40%. What is the EBIT indiff erence point between the two financing options? (2 marks) b) TCA Cable has fixed operating costs of $2.6 million, and its variable cost ratio is 0.30. TCA has $4.0 million in bonds outstanding with a coupon interest rate of 12%. TCA has 1.0 million common shares and 1,000,000 shares of $1.75 preferred stock outstanding. Total revenues for TCA Cable are $14.2 million. If TCA has a marginal tax rate of 40%, what is its degree of combined leverage? (1 marks) c) Biotec has estimated the costs of debt and equity capital for various proportions of de bt in its capital structure: If Biotec pays a current dividend of $1.00 and expects dividends to grow at a constant rate o f 7%, what is Biotec's stock price if it obtains its optimal capital structure? (2 marks)
