Concept explainers
Concept introduction:
Debt to Equity Ratio:
Debt to equity ratio is calculated to determine the leverage position of the company. It compares the total liabilities of the company with it total shareholders’ equity. The debt to equity ratio is calculated by dividing the Total Liabilities by Total
Basic Earnings per share:
The Basic Earnings per share is the amount of net income earned by each common share outstanding. The Earnings per share calculated by with help of following formula:
To indicate:
The additional information for an investor.
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Cornerstones of Financial Accounting
- Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .80. It's considering building a new $59 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.1 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock. The flotation costs of the new common stock would be 8.9 percent of the amount raised. The required return on the company's new equity is 14 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 3.7 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5.2 percent, they will sell at par. 3. Increased use of accounts payable financing. Because this financing is part of the company's ongoing daily business, it has no flotation costs and the company assigns it a cost that is the same as the overall firm WACC.…arrow_forwardLandman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .75. It’s considering building a new $60 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.3 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 9 percent of the amount raised. The required return on the company’s new equity is 15 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 3.6 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5.3 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs and the company assigns it a cost that is the same as the overall firm WACC. Management…arrow_forwardA new company plans to obtain P18 million financing. The company expects to obtain a yearly income of P2 million before interest and taxes. The firm is considering issuing bonds or an equal amount of bonds and preferred stock. The interest rate on bonds is 14 percent. The tax rate is 46 percent. What financing strategy would you recommend?? (with forecasted income statement)arrow_forward
- The DEF Company is planning a $64 million expansion. The expansion is to be financed by selling $25.6 million in new debt and $38.4 million in new common stock. The before-tax required rate of return on debt is 0.086 and the required rate of return on equity is 0.125. If the company has a marginal tax rate of 0.26, what is the firm's cost of capital? Instruction: Type your answer as a decimal, and round to three decimal placesarrow_forwardLandman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .80 and is considering building a new $45 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.7 million a year in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 7.5 percent of the amount raised. The required return on the company's new equity is 14 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 5 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 8 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC.…arrow_forwardPhotochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .75. It’s considering building a new $76 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.4 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 6.3 percent of the amount raised. The required return on the company’s new equity is 12 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.8 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the…arrow_forward
- 3) As a consultant to KLM Snow Sports Equipment, you have been asked to compute the appropriate discount rate to use to evaluate the purchase of anew warehouse facility. You have determined the market value of the firm's capital structure as follows:Source of Capital Market ValueBonds $600,000Preferred Stock $150,000Common Stock $450,000To finance the purchase, KLM will sell 20‐year bonds, with a 9% coupon rate and semiannual coupons, at the market price of $940. Flotation costs forissuing the bonds are 3 percent of the market price. Preferred stock paying an annual $3 dividend can be sold for $42; the cost of issuing these shares is$3 per share. Common stock for KLM is currently selling for $54 per share. The firm paid a $2.80 dividend last year and expects dividends to continuegrowing at a rate of 5 percent per year. Flotation costs for issuing new common stock will be 6 percent of the market price. The firm’s dividendscurrently equal the net income so there is no internal equity…arrow_forwardQ.An all-equity company is considering borrowing $10,000,000 and using the borrowed funds to repurchase shares. The company's cost of equity is 9%. EBIT is expected to be $3,600,000 every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied. If the company proceeds with the capital restructing, what will be the value of the company according to M&M Proposition I without taxes?arrow_forwardRetlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.88. It's considering building a new $49 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $8.8 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 9% of the amount raised. The required return on the company's new equity is 15%. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of…arrow_forward
- Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .72. It's considering building a new $66.2 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.87 million in perpetuity. There are three financing options: a. A new issue of common stock. The required return on the company's new equity is 15.4 percent. b. A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.1 percent, they will sell at par. c. Increased use of accounts payable financing: Because this financing is part of the company's ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long- term debt of .09. (Assume there is no difference between the pretax and aftertax accounts payable cost.) If the tax rate is 22 percent, what is the NPV of the new plant? Note: A negative…arrow_forwardThe impact of financial leverage on return on equity and earnings per share Consider the following case of Green Rabbit Transportation Inc.: Suppose Green Rabbit Transportation Inc. is considering a project that will require $200,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $45,000. • Common equity outstanding will be 15,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Green Rabbit Transportation Inc.’s return on equity (ROE) on the project will be . In addition, Green Rabbit’s earnings per share (EPS) will be . Alternatively, Green Rabbit Transportation Inc.’s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company’s debt will be 12%. Because the company will finance only 50% of…arrow_forwardA new company plans to obtain P18 million financing. The company expects to obtain a yearly income of P2 million before interest and taxes. The firm is considering issuing bonds or an equal amount of bonds and preferred stock. The interest rate on bonds is 14 percent. The tax rate is 46 percent. What financing strategy would you recommend??arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning