be met through external financing? 3. What constraints do they face in satisfying CCI’s funding needs? Assume a 65% floor on CCIs economic stake” 4. Analyze the proposed solutions. What is a Felines Prides security? What are the advantages/disadvantages to firms using this security? Decompose this security into its debt and equity components. What, economically, is a firm doing when it issues a Felines prides security.? 5. What solution seems to satisfy the financing constraints determined above
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amount of equity financing. 3. A firm’s financial risk is a function of how it manages and maintains its debt. Which one of the following sets of ratios characterizes the firm with the greatest amount of financial risk? A. High debt-to-equity ratio, high interest coverage ratio, stable return on equity. B. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity. C. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity. D.
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1. Discuss the signaling effects for a firm associated with increasing leverage or implementing a stock repurchase. Increasing leverage is increasing debt of the firm. Leverage is associated with net income/EBIT. In general the higher this ratio the higher the risk because in good times higher leverage gives better results but on the the other hand in bad times high leverage causes problems, because increase in leverage will cause an increase of the beta of the firm. Moreover leverage increases
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Projections Without Project With Project (Debt Financed) With Project (Equity Financed) Conclusions and Recommendations 2 3 3 3 4 5 6 6 6 7 8 Appendix Appendix 1 – Project Free Cash Flow and Valuation Appendix 2 – Balance Sheet and Income Statement of Company without Project Appendix 3 – Balance Sheet and Income Statement of Company with Project Financed with Debt Appendix 4 – Balance Sheet and Income Statement of Company with Project Financed with Equity 9 10 11 12 1 Executive
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773 California Pizza Kitchen is an unlevered company that has no debts in the capital structure of the company, and whose sole source of financing is equity. With a return on equity of 10.1% in 2006, CPK earned a return greater than its cost of capital, but did not benefit from financial leverage. Below we will illustrate how levered cost of capital may be a cheaper alternative for CPK. Increases of debts in the capital structure of the company will impact different key variables
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Long-Term Financing Long- term financing strategies are used by financial managers to insure that funds invested today will increase in value or stay the same over a stated period of time. This document will compare and contrast the capital asset pricing model (CAPM) and discounted cash flow method (DCF). The debt and equity mix are intended to enable an organization to capitalize on investments. The debt and equity mix will be reviewed as will the characteristics of the financial market and debt and
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zero debt financing. Its operating profit is $1 million, and it pays taxes at a 40% rate. It has $5 million in assets and, because it is all equity financed, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing that bears an interest rate of 8%. a) What impact would the new capital structure have on the firm’s profit, total dollar return to investors, and return on equity? b) Redo the analysis, but now assume that the debt financing would
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financial statements of the company identify and explain the amount of financing sources the company have from the short term, intermediate and long term financing. Compare each of the financing sources to the company’s total amount of financing. 3. Based on your answers in Part 2 and the company’s financing requirements, identify and explain the company’s main source of financing. Evaluate the importance of the financing source and the effects on the company’s capital structure. Answer:
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and a irr higher then the set hurdle rate - relative to market interest rates, project risk, and estimates . then this is consistent with its strategy of growth • Optimize the use of debt in the capital structure. o by focusing on its ability to service its debt. The lower they can bring their debt percentage their value will increase and is consistent with its strategy of growth • Repurchase undervalued shares o Buys backs will result in a higher PE ratio and investors
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refers to the proportion of debt and equity being used to finance a firm’s assets: Assets = Debt + Equity Capital Structure - In this lesson we will examine the notion that capital structure affects the value of the firm. That is, the value of the firm might change with the amount of debt that is present. - This would occur because the cost of financing with debt (AtRd) is normally lower than the cost of financing with equity (Rs), which means the WACC
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