UI JUNUI SI Economics Financial Management II Capital Structure and Leverage - 3 Chapter 14 Assignment 17 Examples 1. Slides recapitalization example data: ra Bond Rating Amount Borrowed SO 250,000 500,000 750,000 1,000,000 1,250,000 D/Asset Ratio 0 0.125 0.250 0.375 0.500 0.625 D/E Ratio 0 0.143 0.333 0.600 1.000 1.667 1 AA BBB BB B 8.0% 9.0% 11.5% 14.0% 16.5% EBIT = $400,000 Tax rate = 40% # of shares outstanding when there is no debt = 80,000 Total assets = $2,000,000 Unlevered beta-1.00 sk-free rate=6% Market risk premium - 6% Market price of shares = $25 New debt is used to repurchase shares so total assets remain same. Problems for Assignment 1. Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt English (US) ds TR MacBook Pro * 30 F3 & 9 8 7 $ 4 6 5 3 UI JUNUI SI Economics Financial Management II Capital Structure and Leverage - 3 Chapter 14 Assignment 17 Examples 1. Slides recapitalization example data: ra Bond Rating Amount Borrowed SO 250,000 500,000 750,000 1,000,000 1,250,000 D/Asset Ratio 0 0.125 0.250 0.375 0.500 0.625 D/E Ratio 0 0.143 0.333 0.600 1.000 1.667 1 AA BBB BB B 8.0% 9.0% 11.5% 14.0% 16.5% EBIT = $400,000 Tax rate = 40% # of shares outstanding when there is no debt = 80,000 Total assets = $2,000,000 Unlevered beta-1.00 sk-free rate=6% Market risk premium - 6% Market price of shares = $25 New debt is used to repurchase shares so total assets remain same. Problems for Assignment 1. Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt English (US) ds TR MacBook Pro * 30 F3 & 9 8 7 $ 4 6 5 3