(a) Discuss briefly why capital structure decisions are important and/or not imp
ID: 2816960 • Letter: #
Question
(a) Discuss briefly why capital structure decisions are important and/or not important for a firm. (S Marks) How do you differentiate the corporate leverage from the home-made leverage in the arbitrage process? (2 Marks) Explain briefly how trade-off theory differs from pecking order theory. (3 Marks) (b) (c) (d) Kelanivalley Manufacturing Company has a total capital of Rs. I million and it carns profit of Rs.100,000 before interest and tax. The newly appointed financial manager wants to take a decision on its capital structure. He has taken the following capital structure information after studying the Sri Lankan capital market. Amount of Debt Rs Debt Cost of Capital Equity Cost of Capital (at given level of d 10% 10.5% 11% 1196 12.4% 13.5% 16% 20% 100000 200000 300000 400000 496 4.5% 5% 5% 5.5% 0% 8% 600000 1) What amount of debt the company should maintain according to the optimal capital structure decisions? 2) Estimate the equity cost of capital according to Modigliani and Miller theory (proposition II). (6 Marks) (e) The following financial information is extracted from ABC Company listed in the Colombo Stock Exchange. Rs. 1000,000 (300,000) (400000) 300,000 Sales Variable operating cost Fixed operating cost EBIT Interest EBT Tax @40% EAT Preferred dividends Earnings available for common stockholders 200,000 120,000 Number of shares outstanding 50,000 1) 2) Calculate the degree of finance leverage. If EBIT decrease by 20%, what is your forecast of EPS?Explanation / Answer
There are too many questions posted as per policy I am solving the first one.
Based on the capital structure the firm polices the total cost of capital for the firm will vary which will effect the company’s ability to raise the money in the market or banks. The company has to follow the optimal capital structure by which it will minimize the costs for it and give best return to all the stakeholders
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.