The J. Kelce Corporation has determined that they need to raise an additional $1,400,000 to support...

 

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The J. Kelce Corporation has determined that they need to raise an additional $1,400,000 to support the projected level of operations in the coming year. These funds can be raised through a bank loan that has already been approved at an interest rate of 9% OR by the sale of additional shares of common stock. Currently, Kelce has 2000 bonds outstanding that carry a coupon rate of 10% and a par value of $1000. The bonds mature in 5 years and have a market price of $1018.52. The current market price of Kelce common stock is $58 and there are 100,000 shares outstanding. Analysts estimate J. Kelce Corporation's beta coefficient at 1.7 and approximate the average market risk premium at 7%. Treasury bills currently yield 5%. Kelce has forecasted their earnings before interest and tax (EBIT) to be $1,800,000. The marginal tax rate is 30%. All earnings will be paid out as dividends. Ignoring flotation costs, determine whether Kelce should raise the additional funds by issuing equity or taking out the loan by answering the following questions: d. C. a Qualitatively, what general factors should Kelce consider in making its decision between debt and equity? (10 points) b. b. Determine carnings per share (EPS) for the coming year if the firm raises the necessary funds through the bank loan. (6 points) a. c. Determine EPS for the coming year if the firm raises the necessary funds by issuing new common stock. (6 points) d. Determine the weighted average cost of capital (WACC) if Kelce raises the funds with debt. (14 points) (14 points) c. Determine WACC if Kelce raises the funds with equity. f. At what breakeven EBIT level will EPS be the same under the two different capital structures being considered? (6 points) i. Is it reasonable to assume that the cost of debt will be the same under both the debt and equity options? Explain. (2 points) j. Is it reasonable to assume that the cost of equity will be the same under both the debt and equity options? Explain. (2 points) B. Explain why each of the following statements is false; g. Based on your answers in (a) through (f), should Kelce borrow the additional funds or issue new common shares? Why? (3 points) h. Is it reasonable to assume that EBIT will be the same under both the debt and equity options? Explain. (2 points) (5 points each) A firm should maximize its cost of capital since it measures the return to its suppliers of capital. Because financial leverage increases the return to stockholders, it also leads to increasing a firm's MVA. Capital structure is the main driver behind a firm's ability to increase MVA. Firms whose sales levels change drastically over time should rely more heavily on debt financing in their capital structures. The J. Kelce Corporation has determined that they need to raise an additional $1,400,000 to support the projected level of operations in the coming year. These funds can be raised through a bank loan that has already been approved at an interest rate of 9% OR by the sale of additional shares of common stock. Currently, Kelce has 2000 bonds outstanding that carry a coupon rate of 10% and a par value of $1000. The bonds mature in 5 years and have a market price of $1018.52. The current market price of Kelce common stock is $58 and there are 100,000 shares outstanding. Analysts estimate J. Kelce Corporation's beta coefficient at 1.7 and approximate the average market risk premium at 7%. Treasury bills currently yield 5%. Kelce has forecasted their earnings before interest and tax (EBIT) to be $1,800,000. The marginal tax rate is 30%. All earnings will be paid out as dividends. Ignoring flotation costs, determine whether Kelce should raise the additional funds by issuing equity or taking out the loan by answering the following questions: d. C. a Qualitatively, what general factors should Kelce consider in making its decision between debt and equity? (10 points) b. b. Determine carnings per share (EPS) for the coming year if the firm raises the necessary funds through the bank loan. (6 points) a. c. Determine EPS for the coming year if the firm raises the necessary funds by issuing new common stock. (6 points) d. Determine the weighted average cost of capital (WACC) if Kelce raises the funds with debt. (14 points) (14 points) c. Determine WACC if Kelce raises the funds with equity. f. At what breakeven EBIT level will EPS be the same under the two different capital structures being considered? (6 points) i. Is it reasonable to assume that the cost of debt will be the same under both the debt and equity options? Explain. (2 points) j. Is it reasonable to assume that the cost of equity will be the same under both the debt and equity options? Explain. (2 points) B. Explain why each of the following statements is false; g. Based on your answers in (a) through (f), should Kelce borrow the additional funds or issue new common shares? Why? (3 points) h. Is it reasonable to assume that EBIT will be the same under both the debt and equity options? Explain. (2 points) (5 points each) A firm should maximize its cost of capital since it measures the return to its suppliers of capital. Because financial leverage increases the return to stockholders, it also leads to increasing a firm's MVA. Capital structure is the main driver behind a firm's ability to increase MVA. Firms whose sales levels change drastically over time should rely more heavily on debt financing in their capital structures.

Answer rating: 100% (QA)

ANSWERS a General factors Kelce should consider in making its decision between debt and equity 1 Cost of capital Kelce should evaluate the cost of ... View the full answer