Investors currently require a 16 return on the common stock and an 8 return on the debt. If Northem Sludge issues an additional 10 million of common stock and uses this money to retire debt, what happens to the expected retum on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes. (L01) Earnings and leverage. Reliable gearing currently is all-equity-nanced. It has 10,000 shares of equity outstanding. Selling at 100 a share. The rm is considering a capital restructuring.
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Rework table.3 to show how earnings per share and share return new vary with operating income. Suppose an investor is unhappy with river Cruises' decision to borrow 250,000 (see the previous question). What modications can she make to her own investment portfolio to offset the effects of the rms additional borrowing? L01 leverage and pie ratio. Calculate the ratio of price to expected earnings for river Cruises both before and after it borrows the 250,000 (see question 9). Why does the pie ratio fall after the increase in leverage? Now suppose that the corporate tax.35. Demonstrate that when river Cruises borrows the 250,000, the combined after-tax income of its reassignment debtholders and equityhold- ers increases (compared to all—equity nancing) by 35 of the rms interest expense regard- less of the state of the economy. (L02) Equity return and leverage. The common stock and debt of Northern Sludge are valued at 70 million and 30 million, respectively.
Give three examples of the types of costs incurred by rms in nancial distress. (L03) peaking Order Theory. What is the pecking order theory of optimal capital structure? If the theory is correct, what types of rms would you expect to listing operate at high debt levels? Why is nancial slack valuable? (Him: What does the pecking order theory say about nancial slack? Are there circumstances where too much nancial slack might actu- ally reduce the market value of the rm?) (L04) Earnings and leverage. Suppose that river Cruises, which currently is all-equity-financed, issues 250,000 of debt and uses the proceeds to repurchase 25,000 shares. Assume that the rm pays no taxes and that debt nance has no impact on its market value.
(Hint: Construct a simple numerical example book showing how nancial leverage affects the total cash flow available to debt and equity investors. Be sure to hold pretax operating income constant.) (L02) Value of Tax Shields. Establishment Industries borrows 800 million at an interest rate.6. It expects to maintain this debt level into the far future. What is the present value of inter- est tax shields? Establishment will pay tax at an effective rate. What is the trade-off theory of optimal capital structure? How does it dene the optimal debt ratio?
As nancial leverage increases, the value of the rm increases by just enough to offset the additional nancial risk absorbed by equity. The cost of equity increases with nancial leverage only when the risk of nancial distress is high. If the rm pays no taxes, the weighted-average cost of capital does not depend on the debt ratio. Chapter 16 Debt Policy 469. Increasing nancial leverage can increase both the cost of debt (Poem) and the cost of equity (requily). How can the overall cost of capital stay constant? (Assume the rm pays no taxes.) (L01) Tax Shields. What is an interest tax shield? How does it increase the size of the pie" for after- tax income stockholders?
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Is the army rm likely to continue paying taxes over the full life of letter a debt issue? Safe, consistently protable rms are most likely to stay in a taxpaying position. Financial distress is costly even if the rm survives. Other things equal, nancial distress is more likely for rms with high business risk. That is why risky rms typically issue less debt. If distress does occur, the costs are generally greatest for rms whose value depends on intangible assets.
Such rms generally borrow less than rms with safe, tangible assets. How much is enough? More slack makes it easy to nance future investments, but it may weaken incentives for managers. More debt, and therefore less slack, increases the odds that the rm may have to issue stock to nance future investments. " Wumgmm listing of equations d 16- rcquity rassets e (rasscts _ Hem) annual tax shield t x (rdcb, x d) rdcbt l'ttetn.3 Value of levered rm value if all-equity-nanced ted.2 pv tax shields — tcd - mmmmmqnu questlonsi a med. MMs leverage-irrelevance proposi- iflNANtE lion says: (L01 ). The value of the rm does not depend on the fraction of debt versus equity nancing.
If external nancing is needed, they pre- fer to issue debt rather than issue new shares. The pecking order theory starts with the observation that managers know more than outside investors about the rms value and prospects. Investors realize that rms may seek to issue equity when their stock is overval- ued and therefore mark down the stock price when an equity issue is announced. Internal nancing avoids this problem. If external nancing is necessary, debt is the rst choice. The pecking order theory says that the amount of debt a rm issues will depend on its need for extemal nancing.
The theory also suggests that nancial managers should try to maintain at least some nancial slack, that is, a reserve of ready cash or unused borrowing capacity. On the other hand, too much nancial slack may lead to slack managers High debt levels (and the threat of nancial distress) can create strong incentives for managers to work harder, conserve cash, and avoid negative—npv investments. 5 there a rule for nding Sorry, there are no simple answers for capital structure decisions. Debt may be better than optimal capital structure? Equity in some cases, worse in others. But there are at least four dimensions for the nan- (L03, 4) cial manager to think about. How valuable are interest tax shields?
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Watch queue, queue _count total loading. Another gem from the late rinfernal's personal playlist, we made it over 100,000! As Requested by violet Spark, song: Aruarian Dance. Artist: Nujabes, album: Samurai champloo ost, no copyright infringement intended. จากเดิม บริษัท สรพสินคาเซ็นทรัล จำกัด (สาขาภูเก็ต) สาขาที 00028 เลขที 74-75 หมูที 5 ตำบลวิชิต อำเภอเมืองภูเก็ต จังหวัดภูเก็ต 83000 เปลียนเป็น บริษัท สรพสินคาเซ็นทรัล จำกัด (สาขาภูเก็ต) สาขาที 00028 เลขที 199 หมูที 5 ตำบลวิชิต อำเภอเมืองภูเก็ต จังหวัดภูเก็ต 83000. Unformatted text preview: a) barbing 468 Part five debt and payout Policy e whats the pecking order The pecking order theory says that rms prefer internal nancing (that is, earnings theory? (L04) retained and reinvested) over external nancing.writings
In some instances, technology also can increase performance in the business form of faster service. . For example, in many fast-food restaurants, the timed drink dispensers do not require servers to stand by the beverage machine holding the button. Instead, a quick push of the button begins the flow of a specific amount of beverage, permitting the server to assemble the rest of the order while the drink is being poured. Other examples of technology being used in fast-food operations include a conveyor belt broiler at Burger King restaurants that ensures a consistently cooked hamburger, again without the worker being continuously present during the cooking operation, and deep fat fryers with timers that automatically lift the french fries out. Technology in the form of computerized order-entry devices allows waiters and waitresses to place orders in the kitchen without having to walk across the restaurant. Instead of having to make two trips to the kitchen-one to place the order and another to pick it up when it has been cooked-waitstaff are now only required to make a single trip to pick up the food when it is ready. Related Operations, management, assignments. Aruarian Dance lowered Pitch Homework Edit.
tickets to pay their fines over the Internet without having to appear in person, which was the previous' norm. Increased use of the Internet in this manner also will reduce long lines at Registry locations and hopefully reduce its annual operating expenses.' A note of caution is necessary, however, when contemplating the introduction of totally automated services. As we have noted already, there are some segments of the market that are not totally comfortable with using automation. In addition, while automation can usually do a good job performing routine transactions, there are often complex and highly customized transactions that can be resolved only with the customer interacting directly with a knowledgeable employee. Technology in the form of automation also can be used in service operations to perform repetitive, time-consuming tasks. The use of technology in this manner cannot only increase worker productivity, but also reduce or eliminate errors. At the same time, it ensures the delivery of a more consistent product to the customer.
Edi is very fast and efficient. It does have several shortcomings. First, companies must painstakingly link their operations to a specific ED! Software and then Synchronize protocols (such as which version of the software they use) with summary the firms with which they want to conduct business. The format for, edi. Very inflexible and often does not adapt well to new applications. In addition, edl moves data in belch mode and.
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Hybrid learning can increase student learning and student success. Online lectures, tutorials and exercises free up class time for deeper discussions, small group activities, and explanations of misconceptions. It encourages students to play an active role in their in-class learning. Involved students come to have a better understanding first of the material and are more motivated to pursue the topics presented. Electronic Data Interchange edi electronic data interchange edi ) can be defined as the electronic exchange of data in highly specified formats that takes place typically between organizations. Some of the different types of transactions that can be done through EDl include (a) requests for"tions, (b) purchase orders. (c) acknowledgments and confirmations, (d) invoicing, and (e) payments. While the use.