Business Finance Questions - 1612 Words

Question 1 Reliable Gearing currently is all-equity financed. It has 10,000 shares of equity outstanding, selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $200,000 with the proceeds used to buy back stock. The high debt plan would exchange $400,000 of debt for equity. The debt will pay an interest rate of 10%. The firm pays no taxes. a. What will be the debt-to-equity ratio after each possible restructuring? b. If earnings before interest and tax (EBIT) will be either $90,000 or $130,000, what will earnings per share be for each financing mix for both possible values of EBIT? If both scenarios are equally likely, what is expected (i.e., average) EPS under each†¦show more content†¦ Do you agree? Why or why not? Be sure to fully explain the rationale behind your argument. b. Suppose your firm is going to finance a new project 100% with retained earnings. Your boss claims that since the earnings are already being retained and that since no outside financing is required, the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk-free? Why or why not? c. Considering that issuing debt is cheaper than issuing equity; that debt is a less expensive form of financing; and that debt issues tend to be larger in size, why do firms have secondary equity offerings? Why not just issue debt securities once the IPO is complete? d. In each of the theories of capital structure, the cost of equity rises as the amount of debt increases. So why don t financial managers use as little debt as possible to keep the cost of equity down? After all, isn t the goal of the firm to maximize share value (and minimize shareholder costs)? Solutions Question 1: a. Market value of firm is $100 ï‚ ´ 10,000 = $1,000,000. With the low-debt plan, equity falls by $200,000, so D/E = $200,000/$800,000 = .25, and 8,000 shares remain outstanding. With the high-debt plan, equity falls by $400,000, so D/E = $400,000/$600,000 = .67,Show MoreRelatedBusiness Finance: Questions1338 Words   |  6 Pages_____ 12. Management usually desires ________ financial statements and the IRS requires all businesses to file _________ tax returns. a. annual, annual b. monthly, annual c. quarterly, monthly d. monthly, monthly _____ 13. In a service-type business, revenue is considered earned a. at the end of the month. b. at the end of the year. c. when the service is performed. d. when cash is received. _____ 14. Ken s Tune-up Shop follows the revenue recognition principle. Ken services a car onRead MoreQuestions on Management, Business, and Finance1244 Words   |  5 Pages1)  A business should be managed ethically to maintain a good reputation. | A.  Ã‚  True | | B.  Ã‚  False | | | 2)  A business should be managed ethically to reduce employee turnover. | A.  Ã‚  True | | B.  Ã‚  False | | | 3)  A business should be managed ethically to do the right thing for all stakeholders. | A.  Ã‚  True | | B.  Ã‚  False | | | 4)  The sole purpose of accounting is to help managers evaluate the financial condition of the firm so that they may make better decisions.Read More50 Multiple Choice Business – Finance Questions1740 Words   |  7 PagesI need help answering 50 multiple choice Business – Finance Questions. 1. Which of the following is NOT a cash flow that should be included in the analysis of a project? a. Changes in net operating working capital. b. Shipping and installation costs. c. Cannibalization effects. d. Opportunity costs. e. Sunk costs that have been expensed for tax purposes. 2. When evaluating a new project, firms should include in the projected cash flows all of the following factors EXCEPT: a. ChangesRead MoreThe Key Role Of Finance1408 Words   |  6 PagesThe key role of finance in any business is to manage money; whether it be raising capital through share capital and bank loans, raising credit (short-term capital), or handling the costs of the business. Without finance, a business would not function, as quoted by (Griffin, 2015); ‘Money is the lifeblood of a business and finance is the nerve center’. Key activities of the finance department: Firstly, one of the key activities of the finance department is to maintain a check on the costs/outgoingsRead MoreBusiness Management : Corporate Management947 Words   |  4 PagesThe owners of business untimely intend on making profits by conducting business. They usually hire managers with the responsibility of controlling the daily operations of that business. One of the most important organizational managers is the financial manager who is responsible for the finances that are essential. The financial manager monitors and makes decisions that affect both long-term and short-term assets and liabilities using tools like capital budgeting, capital structure, and working capitalRead MoreBrief Introduction Overview of McGraw Hills 9th Edition of Fundamentals of Corporate Finance655 Words   |  3 PagesFundamentals of Corporate Finance – Ross, Westerfield, Jordan McGraw Hill Education (India), 2012, 878 Pp 9th edition ISBN: 13:978-1-25-9027628 Kumar Ratnesh* About Authors Stephen A. Ross is the Franco Modigliant Professor of Finance Economics at the Sloan School of management, Massachusetts Institute of Technology. Randolph W. Westerfield is Dean Emeritus of the University of Southern California’s Marshall school of Business. Bradford D. Jordan is Professor of Finance Holder of the RichardRead MoreFinance And Financial Management : The Major Sub Areas Of Finance772 Words   |  4 PagesQuestion 1: †¢ Proficient-level: Define the terms finance and financial management, and identify the major sub-areas of finance. †¢ Distinguished-level: Describe the nature of risk. Finance: â€Å"The study of applying specific value to things that we own, the services we use, and the decisions we make.† (Cornett, Adair, Nofsinger, 2016, p. 5). Financial Management: â€Å"The process for and the analysis of making financial decisions in the business context.† (Cornett, Adair, Nofsinger, 2016, p. 5). Sub-areasRead MoreIntroduction To Financial Management Essay1146 Words   |  5 Pagesterms finance and financial management, and identify the major sub-areas of finance. Finance is the study of applying specific value to things individuals own to include services used and decisions determined [Finance by Cornett, M. M., Adair, T. A., Nofsinger J. (2014). M: Finance (2nd ed.)]. In simple words, finance is how much value is attributable to goods and services and the basis of such attribution. Financial management may be defined as the management of the finances of a business or anRead MoreHomework1217 Words   |  5 Pageshomework Multiple Choice Questions: 1. Which of the following statements about finance, accounting, and financial management is most correct? a. Accounting is of no value in decision making. b. Accounting provides the theory and concepts necessary to help managers make better decisions. c. Financial management involves the measurement, in financial terms, of operational events that affect the resources and financing of an organization. d. The primary role of finance is to plan for, acquireRead MoreUnderstanding Cashflow Essay777 Words   |  4 Pagesorganisations cashflow. From time to time, business managers may pose questions such as: * Can we afford to buy x? * Are we going to be able to pay that bill? * Wouldnt it be nice if we could develop y? To answer such questions, they will often have to carry out some form of financial planning, and often to seek additional finance from outside the company. The key issues are: * What is the finance for? * How long will it be needed?