Which of the following are ways that a firm can reduce cash flows in order to prevent managers from wastefully spending excess cash flows? Check all that apply. Minimizing the amount of debt in the firm's capital structure so that the firm can borrow money at a reasonable rate when good investment opportunities arise Increasing the amount of debt in the firm's target capital structure in the hope that higher debt-service requirements will force managers to be more disciplined Funneling excess cash flows back to shareholders through higher dividends Funneling excess cash flows back to shareholders through stock repurchases Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering adding some debt and reducing the percentage of outstanding equity in its capital structure. The firm's current (unlevered) beta is 1.45, and its cost of equity is 13.15. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 13.15. The risk-free rate of interest (TRF) is 3%, and the market risk premium (RPM) is 7%. Blue Ram's marginal tax rate is 30%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its WACC. Complete the following table. Market debt to equity ratio wa) Market debt to equity ratio (ws) 1.0 Market debt to equity ratio D/S) Bond Rating Before-Tax Cost of Debt ra) Levered Beta (b) 1.45 Cost of Equity (Is) 13.15% WACC 0.0 0.00 13.15% 0.2 0.8 0.25 8.40% 14.90% 13.10% 0.4 0.6 0.67 BBB 8.90% 2.13 17.91% 0.6 0.4 1.50 BB 11.10% 2.97 14.18% 0.8 0.2 C 14.30% 5.51 41.57% As an analyst, you are tracking the financial performance of Blue Ram Brewing Company. The company has been 100% equity owned for years, but recently the firm's managers made changes to Blue Ram's capital structure. You have collected the following information regarding the company's recapitalization: Blue Ram issued $1,800,000 in new debt to repurchase its outstanding stock. The firm had no short-term investments before or after the recapitalization. Blue Ram had 225,000 shares outstanding before the recapitalization. Blue Ram's capital structure now has 20.00% debt. The company's operations are valued at $9,000,000 before and after the recapitalization. Based on the information available, solve for the values in the following table. Click on the dropdown menus and select the best answer. Assume that you are in a Modigliani and Miller (MM Proposition I) world with no taxes. Value Stock price before the repurchase Number of shares repurchased Value of equity post repurchase Based on your findings, you prepared a report containing several inferences. While proofreading, you come across the following inference: If Blue Ram Brewing Company decides to deleverage in the future, the total number of shares outstanding will keep decreasing until creditors own 100% of the company. Is the statement true or false? False True Which of the following are ways that a firm can reduce cash flows in order to prevent managers from wastefully spending excess cash flows? Check all that apply. Minimizing the amount of debt in the firm's capital structure so that the firm can borrow money at a reasonable rate when good investment opportunities arise Increasing the amount of debt in the firm's target capital structure in the hope that higher debt-service requirements will force managers to be more disciplined Funneling excess cash flows back to shareholders through higher dividends Funneling excess cash flows back to shareholders through stock repurchases Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering adding some debt and reducing the percentage of outstanding equity in its capital structure. The firm's current (unlevered) beta is 1.45, and its cost of equity is 13.15. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 13.15. The risk-free rate of interest (TRF) is 3%, and the market risk premium (RPM) is 7%. Blue Ram's marginal tax rate is 30%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its WACC. Complete the following table. Market debt to equity ratio wa) Market debt to equity ratio (ws) 1.0 Market debt to equity ratio D/S) Bond Rating Before-Tax Cost of Debt ra) Levered Beta (b) 1.45 Cost of Equity (Is) 13.15% WACC 0.0 0.00 13.15% 0.2 0.8 0.25 8.40% 14.90% 13.10% 0.4 0.6 0.67 BBB 8.90% 2.13 17.91% 0.6 0.4 1.50 BB 11.10% 2.97 14.18% 0.8 0.2 C 14.30% 5.51 41.57% As an analyst, you are tracking the financial performance of Blue Ram Brewing Company. The company has been 100% equity owned for years, but recently the firm's managers made changes to Blue Ram's capital structure. You have collected the following information regarding the company's recapitalization: Blue Ram issued $1,800,000 in new debt to repurchase its outstanding stock. The firm had no short-term investments before or after the recapitalization. Blue Ram had 225,000 shares outstanding before the recapitalization. Blue Ram's capital structure now has 20.00% debt. The company's operations are valued at $9,000,000 before and after the recapitalization. Based on the information available, solve for the values in the following table. Click on the dropdown menus and select the best answer. Assume that you are in a Modigliani and Miller (MM Proposition I) world with no taxes. Value Stock price before the repurchase Number of shares repurchased Value of equity post repurchase Based on your findings, you prepared a report containing several inferences. While proofreading, you come across the following inference: If Blue Ram Brewing Company decides to deleverage in the future, the total number of shares outstanding will keep decreasing until creditors own 100% of the company. Is the statement true or false? False True
