SOUTIONS - FORMATIVE QUIZ ON CAPITAL STRUCTURE

1 VU=(100000*.66)/.2
330,000.00
VL=VU+D*TR
VL=330000+(54000*.34)
348,360.00

2 VU=(15700*.62)/.12
81116.66667
VL=81116.67+(12000*.38)
85676.66667
EQUITY=TV-DEBT
73676.66667
D/E 0.162873818
KE=12%+(.12-.06)*.1629*(1-.38)
0.12605988

3 EBIT/178500=EBIT-1790000*.10/71400
298,333.33

4 TOTAL SHARES 400

% DEBT (250000/2400000) 0.10416667
NO. OF SHARES TO BE SOLD 41.6666667

5 BORROWED 2,326.41
AND USED PROCEEDS TO BUY ADDITIONAL SHARES

PROOF: BEFORE AFTER

EBIT 128,000.00 128,000.00
INTEREST 20,000.00
EBT 128,000.00 108,000.00
SHARES OUTS 48,000.00 43,000.00
EPS 2.67 2.51
OWNED 446.53 400.00
TOTAL 1,190.74 1,004.65
INTEREST PAYMENT 186.11
NET RECEIPTS 1,004.63 1,004.65

AFTC WEIGHT WACC

6 DEBT 0.0603 0.58333333 0.035175
EQUITY 0.15558 0.41666667 0.064825
0.1

15.56%=KE+(KE-.09)*1.4*.67
0.1238
 RECAPITALIZATION

NORMAL STRONG %CHANGE

EBIT 16000 20800
INTEREST 4900 4900
EBT 11100 15900
AFTER-TAX 7326 10494
OS 1500 1500
EPS 4.884 6.996 0.4324324

8 DEBT/EQUITY 1.16

15.3%=11.8%+(11.8%-KD)*1.16*.66
0.0722

9 EBIT/9000=EBIT-(120000*.095)/9000-(120000/45)
38,475.00

10 VU=(600000/12000)*80000
VU= 4,000,000.00
VL=VU 4,000,000.00
RATIO
11 EQUITY 2250000 0.75 43500
DEBT 750000 0.25 16500
TOTAL 3000000 60000

SHARES OWNED 500

SHARES SOLD 125
REMAINING 375

PROOF: 100% EQUITY 25% DEBT

EBIT 102,000.00 102,000.00
INTEREST 56,250.00
EBT 102,000.00 45,750.00
OUTS 60,000.00 45,000.00
EPS 1.70 1.02

SHARES OWNED 500.00 375.00

850.00 381.25
INTEREST INCOME 468.75
850.00

12 The financial manager should not invest time analyzing capital structure
Because with no taxes, the capital structure is irrelevant. With taxes the
value of the company will be optimized at 100% debt.