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topjm [15]
2 years ago
9

Suppose a company is financed with $20 million of equity and $60 million of debt. That is, the company obtained $20 million from

shareholders and $40 million from debtholders to finance its operations. Its capital structure is, therefore, 25% (=$20million/ ($20 million+$60 million) ) equity and 75% (=$60million/ ($20 million+$60 million) ) debt. Please provide the solutions to the following questions (a, b) in the box below.
If company issues $30 million new equity in order to retire some of its debt, what would be its new capital structure?
How do you think market would react on the announcement about the new equity issue? Why? Explain.
Business
1 answer:
alexgriva [62]2 years ago
6 0

Answer:

Existing Equity = 20 million

Existing debt = 60 million

Total capital = 20 million + 60 million = 80 million

a. Given company issued 30 million of equity to retire debt

Equity after raise = $20 million + $30 million = $50 million

Debt = $60 million - $30 million = $30 million

Total capital size remain at $80 million

Capital structure, Equity = $50 million/$80 million = 0.625 = 62.50%

Debt = (1-0.625) = 0.375 = 37.50%

b. The market would welcome the new issue as the risk of  the firm would be reduced.

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Which of the following is one of the first steps to take in launching the strategy execution process? A. Form a mission statemen
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The correct answer to the following question will be Option C.

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3 0
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If you borrow $25,000 from a local finance company and you are required to pay $4,424.50 per year for 10 years, what is the annu
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Use this formula:

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A is the final investment amount (4424.50x10)

P is the principal amount (25,000)

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If A= P(1+rt),

then (1+rt) = A/P.

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