# Register now to access 7 million high quality study materials (What's Course Hero?) Course Hero is the premier provider of high quality online educational resources. With millions of study documents, online tutors, digital flashcards and free courseware, Course Hero is helping students learn more efficiently and effectively. Whether you're interested in exploring new subjects or mastering key topics for your next exam, Course Hero has the tools you need to achieve your goals.

12 Pages

### Lecture_19

Course: FINA 4200, Spring 2011
School: UGA
Rating:

Word Count: 309

#### Document Preview

19: Lecture Capital Structure Decision: II BD Chapter 15 Topics Choosing Optimal Capital Structure Mini-Case Estimating Optimal Capital Structure For each capital structure: Estimate cost of debt Estimate cost of equity Calculate WACC Calculate firm value Deduct the value of the debt to find value of shareholders wealth Strasburg Electronics Currently is all-equity financed. Expected EBIT =...

Register Now

#### Unformatted Document Excerpt

Coursehero >> Georgia >> UGA >> FINA 4200

Course Hero has millions of student submitted documents similar to the one
below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

Course Hero has millions of student submitted documents similar to the one below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.
19: Lecture Capital Structure Decision: II BD Chapter 15 Topics Choosing Optimal Capital Structure Mini-Case Estimating Optimal Capital Structure For each capital structure: Estimate cost of debt Estimate cost of equity Calculate WACC Calculate firm value Deduct the value of the debt to find value of shareholders wealth Strasburg Electronics Currently is all-equity financed. Expected EBIT = \$500,000. Firm expects zero growth. Tax rate 40% Market risk premium: RPM = 6%. 10,000 shares outstanding: rs = 12%; beta = 1.0; rRF = 6%; No short-term investment What if the firm changes its debt ratio to 40%? Estimating Cost of Debt Strasburg Electronics cost of debt with different capital structures: Cost of debt goes up as leverage and threat of bankruptcy increases Estimating Cost of Equity MM theory implies that beta changes with leverage. bU is the beta of a firm when it has no debt (the unlevered beta) Hamadas equation: b = bU [1 + (1 - T)(D/S)] b=1*(1+(1-0.4)(0.4/0.6))=1.4 WACC rS=6%+1.4*6%=14.4% Calculating and Firm Value WACC = 0.4*(1-0.4)*9% + 0.6*14% = 10.8% Calculate FCF With no growth, investment in working capital will be zero. FCF = NOPAT = \$40,000*(1-.4) = \$24,000 VOP = 24,000/10.8% = \$222,222. Calculate firm value With no short-term investment, Firm Value is \$222,222 40% Debt Maximize Firm Value Does 40% debt also maximize shareholders value? Is 40% debt optimal capital structure? Currently with zero debt, Strasburgs equity value is \$200,000. To change its capital structure to 40% debt, Strasburg will issue debt to repurchase equity. Before repurchasing stock, Strasburg will temporarily put the cash proceeds from the debt issue into shortterm investments. When Strasburg is ready to repurchase equity, it will pay the cash proceeds to buy back stocks. Effects of Change in Capital Structure Analyzing the results Mini-Case The case will be distributed in class for the in-class practice.
Find millions of documents on Course Hero - Study Guides, Lecture Notes, Reference Materials, Practice Exams and more. Course Hero has millions of course specific materials providing students with the best way to expand their education.

Below is a small sample set of documents:

UGA - FINA - 4200
Mini-Case and Solution: Lecture 19Correction: The starting market price is \$25 (the case delivered in class says \$41.67)You have just been hired as business manager of TacoPalace, a taco restaurant on BroadStreet. The companys EBIT was \$500,000 last ye
UGA - FINA - 4200
Lecture 20: Bankruptcy,Reorganization and LiquidationBD Chapter 25Topics Overview of bankruptcies Informal remedies Formal reorganizationTop Ten Largest Bankruptcies Since 1980What are the major causes of businessfailure? Economic factors indus
UGA - FINA - 4200
Lecture 21: Bankruptcy,Reorganization and Liquidation: IIBD Chapter 25Topics Illustration of a Reorganization. Liquidation under Chapter 7.Illustration of a Reorganization Columbia Software Company is a regional firmthat specializes in selling acc
UGA - FINA - 4200
Lecture 22: Merger andAcquisitions: IBD Chapter 26Topics Overview of Mergers. Overview of Merger Analysis. Illustration of three approaches forconstant capital structure.Valid economic reason for mergers Synergy: Value of the whole exceeds sum of
UGA - FINA - 4200
Lecture 23: Merger andAcquisitions: IIBD Chapter 26Topics Setting the bid price. Merger analysis when there is apermanent change in capital structure. Leveraged buy-out (LBO) and Divesture.Setting the bid price The valuation models show that \$83.
UGA - FINA - 4200
SYLLABUS Spring 2010Corporate Finance Theory, FINA4200Course Description: This course develops a framework that is useful for understanding abroad range of important corporate financial decisions. Substantial emphasis will be placedon discussion of th
UGA - HACE - 3200
5/10/2010Teaching PhilosophyHACE 3200real education can occur only when thereis no fear. Learning flourishes where we aregiven enough space and freedom to risk togiven enough space and freedom to risk, tomake mistakes, to fail without seriousconse
UGA - HACE - 3200
Like I saidMoney andMarriageChapter 1Financial Planning:The Ties That Bind12What does a penny meanto you?ONLY \$10,737,418.23 (try this yourself: .01 * 100% for 30periods What will you haveif you double apenny a day for 30days?days?3 If
UGA - HACE - 3200
5/10/2010My Financial PlanningPhilosophyChapter 2: Part 1Measuring Your FinancialHealth and Making a Plan1Personal Financial PlanningProcess (review)2Step 1: Evaluate yourFinancial HealthStep 1: Evaluate Your FinancialHealthStep 2: Define Yo
UGA - HACE - 3200
1/20/2010Review Chapter 2 pt. 1Chapter 2: part 2Measuring your financial healthUsing Ratios: A FinancialThermometerBalance sheetAssets &amp; LiabilitiesNet WorthPersonal Income StatementIncome StatementIncome &amp; ExpendituresFair Market ValueBudget
UGA - HACE - 3200
Time Value of MoneyChapter 3 A dollar received today is worth more thana dollar received in the future. The sooner your money can earn interest,the faster the interest can earn interestthe faster the interest can earn interest.Understanding The Tim
UGA - HACE - 3200
Aquickreview:asingledeposit FV=PV(1+i)nChapter3:TimeValueofMoney(part2) Whatyourmoneywillgrowtobe PV=FV[1/(1+i)n] Whatyourfuturemoneyisworthtoday Inflationadjustedinterestrate: (1+i)/(1+r) 1 Substitutingi*foriwhencontrollingforinflation_Annuitie
UGA - HACE - 3200
Prentice-Hall, Inc.Importance of Tax PlanningChapter 4Tax Planning and StrategiesIncome Tax Structure _- progressive tax meaningthat the more you earn the more you pay _ - income ranges for whichthe same marginal tax rate appliesthe same marginal
UGA - HACE - 3200
Prentice-Hall, Inc.The Need for Liquidity Liquidity offers _Chapter 5Cash or Liquid AssetManagementRisks associated with liquid assets_ trade-off - higher liquidity meanslower returns_ risk - cash on hand is easier tospendenables you to have im
UGA - HACE - 3200
Prentice-Hall, Inc.Today: Chapter 6Using Credit Cards:The Role of Open CreditDefinitions and Examples of Credit_ receiving cash, goods, orservices with an obligation to pay later._ credit that you canmust repay in fixed paymentsmust repay in fixe
UGA - HACE - 3200
Prentice-Hall, Inc.Characteristics of ConsumerloansChapter 7Using Consumer Loans:The Role of Planned Borrowing Single payment (balloon) vs. installmentloans (_) Secured vs. unsecured Variable rate (tied to other national rate)(tivs. fixed rate
UGA - HACE - 3200
Prentice-Hall, Inc.Your automobile!Chapter 8The Automobile Decision Is a__: a good that providesbenefits that extend beyond oneyear.Expenses Expenses for auto include: Insurance (vehicle model, driving record) _ (annual periodicexpense)expen
UGA - HACE - 3200
Prentice-Hall, Inc.HousingWeighing the alternatives ofrenting vs. buying Personal and lifestyle considerations Financial considerations http:/www.kiplinger.com/tools/Houses Typically single-family, free-standingdwellings _more spacespacegreat
UGA - HACE - 3200
Prentice-Hall, Inc.TheInsuranceIndustryChapter9TheRoleofLifeandHealthInsuranceInsurance Ininsurance,_isdefinedasuncertaintywithrespecttoeconomicloss. Whenyouhaveafinancialinterestinsomething(life,health,income,property)youfaceriskthatyourbudgetca
UGA - HACE - 3200
Prentice-Hall, Inc.Why insurance? Risk: an uncertainty with respect toeconomic loss.Chapter 9The Role of Life and HealthInsurance Risk avoidance Loss preventionprevention Risk assumption Insurance (shared risk)Average Annual HealthPremiumHea
UGA - HACE - 3200
Prentice-Hall, Inc.A question:Chapter 10Property and Liability Insurance Suppose a tornado destroyed your home.Could you afford to replace your dwellingand its contents? Most people cant. Events like this canpeople can Events like this cancause f
UGA - HACE - 3200
Prentice-Hall, Inc.The Personal Automobile Policy(PAP)Chapter 10Property and Liability InsuranceAuto Insurance _ million car crashes in theU.S. annually, or about 1 accident forevery 5 licensed drivers.TermsTerms: _ Insurance: protectsagainst
UGA - HACE - 3200
Prentice-Hall, Inc.Investing Versus SpeculatingChapter 11Investment Basics _ - putting your money into anasset that generates a return Examples - stocks, bonds, mutual funds, orreal estate _ - putting your money intoan asset that the future value
UGA - HACE - 3200
Prentice-Hall, Inc.Security Markets: a place whereyou buy or sell securitiesChapter 12 The primary markets Secondary markets - stocks Secondary markets - bondsSecurities MarketsA SecurityThe _ Market An investment instrument, other than aninsur
UGA - HACE - 3200
Prentice-Hall, Inc.Chapter 13Basics of Investing in StocksStock is a share in the ownership of acompany.Why would a company offer this?Investing in StocksCompany ownership.One vote per share to elect the_ at annualmeetings is the extent to which
UGA - HACE - 3200
Prentice-Hall, Inc.What are bonds?Chapter 14Investing in bonds and otherinvestments Similar to an I.O.U. When you purchase a bond,you are lending money to a government,municipality, corporation, federal agency orother entity known as the issuer.
UGA - HACE - 3200
Prentice-Hall, Inc.What Is a Mutual Fund?Chapter 15Mutual Funds: An Easy Way toDiversify_ that pools money frominvestors to buy stocks, bonds, and otherinvestments. Investors own a share of thefund proportionate to the amount of theinvestment.Wh
UGA - HACE - 3200
Prentice-Hall, Inc.Do your researchChapter 16 Best places to retire: http:/money.cnn.com/best/bpretire/Retirement Planning:Finding your own pot of gold atthe end of the rainbow.Retirement Its Up to YOU! Start saving today although retirementseem
UGA - HACE - 3200
Prentice-Hall, Inc.Funeral PlanningChapter 17Estate Planning: Saving YourHeirs Money and HeadachesObjectives of Estate PlanningDistribute _Provide for dependentsSelect guardians for minorsMinimize estate and inheritance taxesMinimize settlement
UGA - HACE - 3200
BOND PRACTICE PROBLEMS1. Calculate the current yield on the following bond: Par Value = \$1,400; CurrentValue = \$680; coupon interest rate = 7.5%.2. Calculate the current yield on the following bond: Par Value = \$3,500; currentvalue = \$1,350; coupon in
UGA - HACE - 3200
H ACE 3200 CHAPTER 2 PRACTICE PROBLEMS: RATIOS1. John and Kate sat down and did their balance sheet. They find that they have:\$1,700 in savings; 2 cars worth \$10,400 each; \$8,000 in checking; \$25,000 in theirt rust fund; \$3,000 in cash; and \$18,000 in
UGA - HACE - 3200
HACE 3200 I=P*R*T Practice problemsCalculation of interest under the simple interest method is as follows: Interest = Principle *Rate * Time *remember to keep time in relation to 1 year. For example: 12 months = T = 1;24 months = T = 2; 6 months = T =
UGA - HACE - 3200
UGA - HACE - 3200
PRACTICE PROBLEMS FOR CREDITQuestion 1Charlie's previous balance on his visa card was \$1500. He made a payment of \$800.Using the adjusted balance method, calculate Charlie's finance charges for the month ofApril if his visa card charges him an Annual
UGA - HACE - 3200
EXAM 3INVESTING PRACTICE PROBLEMSQuestion 1If you want to have \$2.3 million dollars (\$2,300,000) in your investment account in 30years and you can earn an annual rate of return on your investments of 9.5%, how muchdo you need to invest annually to ha
UGA - HACE - 3200
HACE 3200 EXAM 3MORE INVESTING PRACTICE PROBLEMSIf you want to have \$3.2 million dollars in your stock portfolio in 25 years and you canearn an annual rate of return on your investments of 8.2%, how much do you need toinvest annually to have \$3.2 mill
UGA - HACE - 3200
Finals practice problems. You should end up with the answer that is given.April wants to have 1.75 Million dollars in her retirement account in 45 years. If she gets anannual rate of return of 7.75% on her investment. How much does she need to save each
UGA - HACE - 3200
MUTUAL FUNDS PRACTICE PROBLEMS1. Calculate the Net Asset Value of the following Mutual Fund: holdings = \$550million; liabilities = \$35 million; 15 million shares outstanding.2. Calculate the Net Asset Value of the following Mutual Fund: holdings = \$845
UGA - HACE - 3200
UNIVERSITY OF GEORGIAHOUSING AND CONSUMER ECONOMICS3200 FAMILY FINANCIAL MANAGEMENTMAYMESTER 2010MAY 11-JUNE 2Class Time: MTWRF 9:30 AM-12:15 PMLocation: 430 CHEMISTRYINSTRUCTOR:Diann Moorman, Ph.D.Office: 209 Dawson HallPhone: 706.542.5661E-ma
UGA - HACE - 3200
1. The average cost of a wedding is \$20,000 today. What will the cost of a wedding be in 5years if prices increase at a rate of 4% due to inflation.2. Today Sally has \$20,000 in savings for her wedding which is 5 years away. She has it inan account ear
UGA - HACE - 3200
TVM PRACTICE PROBLEMS1. You received a \$3,000 academic award this year. You placed it in a savingsaccount paying 8% annual interest. Inflation is running at an annual rate of4.17%. Controlling for inflation, How much will your account be worth in 5yea
UGA - HACE - 3200
Time Value of Money SINGLE PAYMENT1. What is the future value of \$500 if it is invested in an account for 30 years and earns anAnnual Percentage Rate of 15% compounded annually2. What is the future value of \$500 if it is invested in an account for 30 y
UGA - HACE - 3200
Time value of moneyannuities1. You anticipate that you will need \$10,000 to travel to Spain in 8 years. However,inflation will make your trip cost more. Inflation is currently running at 1.88%.Controlling for inflation, how much must you deposit each y
UGA - STAT - 4260
UGA - STAT - 4260
UGA - STAT - 4260
Scheaffer,Mendenhall,OttExercises4.14p=yin B = 2=25 5= = 0.83 30 6pq N n (5 / 6)(1 / 6) 300 30 =2 =.131 N 300 n 1294.15B=.05D=B2/4=(.05)2/4=.000625FromEquation(4.19),wehaven=Npq300 (5 / 6) (1 / 6)== 127.90 128 ( N 1) D + pq 299
UGA - STAT - 4260
UGA - STAT - 4260
UGA - STAT - 4260
UGA - STAT - 4260
STAT 4/6240, Fall 2010HW3, will not be collectedI have attached scanned pages from the book by Scheaer et al. I have marked a few problems inthese scanned pages.1. Problem 3.16, Scheaer et al. This problem is related to my comments in the rst paragrap
UGA - STAT - 4260
UGA - STAT - 4260
UGA - STAT - 4260
UGA - STAT - 4260
UGA - STAT - 4260
UGA - STAT - 4260
Tree123456789101112averageVarianceBasal ar0.30.50.40.90.70.20.60.50.80.40.80.6Volume6971915512920918130.5611.83yi-r*xi-0.36-1.6-1.48-0.070.160.76-0.72-1.63.040.521.040.28tau-ytau-xMu-xrNnVar(ta
UGA - STAT - 4260
UGA - STAT - 4260
Simple Random Sampling (continued)Scheaer et al. in Chapter 4 of their book considered the following case study as partof application of simple random sampling. To nd out if Americans are consuming lessalcohol, a Gallup poll of approximately 1200 Ameri
UGA - STAT - 4260
UGA - STAT - 4260
Simple Random Sampling (continued)Scheaer et al. in Chapter 4 of their book considered the following case study as partof application of simple random sampling. To nd out if Americans are consuming lessalcohol, a Gallup poll of approximately 1200 Ameri
UGA - STAT - 4260
Austin WenSTAT 4260Final Project First DraftI.IntroductionThe original objective of this project is to estimate the mean batting average of all theMajor League Baseball players in the 2010 season. However, not everyone had the sameopportunity to ba