All Related Questions of Debt Financing

Q: Assume that you have just been hired as business manager of Campus

Assume that you have just been hired as business manager of Campus Deli (CD), which is located adjacent to the campus. Sales were $1,100,000 last year, variable costs were 60% of sales, and fixed cost...

Q: At year-end 2008, total assets for Ambrose Inc.

At year-end 2008, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2008 were $2.5 million, are expected to increase by 25% in 2009. Total assets and...

Q: Empire Industries forecasts net income this coming year as shown below (

Empire Industries forecasts net income this coming year as shown below (in thousands of dollars): Approximately $200,000 of Empire’s earnings will be needed to make new, positive-NP...

Q: In May 2001, the Securities and Exchange Commission sued the former

In May 2001, the Securities and Exchange Commission sued the former top executives at Sunbeam, charging the group with financial reporting fraud that allegedly cost investors billions in losses. Sunbe...

Q: A common problem facing any business entity is the debt versus equity

A common problem facing any business entity is the debt versus equity decision. When funds are required to obtain assets, should debt or equity financing be used? This decision also is faced when a co...

Q: EDGAR, the Electronic Data Gathering. Analysis, and Retrieval system

EDGAR, the Electronic Data Gathering. Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance and forwarding of submissions by companies and others who are requ...

Q: Why is the use of debt financing referred to as financial “

Why is the use of debt financing referred to as financial “leverage”?

Q: Dorchester, Ltd. is an old-line confectioner specializing in

Dorchester, Ltd. is an old-line confectioner specializing in high-quality chocolates.Through its facilities in the United Kingdom, Dorchester manufactures candies thatit sells throughout Western Europ...

Q: After looking into debt financing through notes, mortgage, and bonds

After looking into debt financing through notes, mortgage, and bonds payable, Canyon Canoe Company decides to raise additional capital for the planned business expansion. The company will be able to a...

Q: In the business world of the Roaring Twenties, the schemes and

In the business world of the Roaring Twenties, the schemes and scams of flimflam artists and confidence men were legendary. The absence of a strong regulatory system at the federal level to police the...

Q: International Associates (IA) is about to commence operations as an

International Associates (IA) is about to commence operations as an international trading company. The firm will have book assets of $10 million, and it expects to earn a 16% return on these assets be...

Q: Christina Molitoris is preparing for a meeting of the board of directors

Christina Molitoris is preparing for a meeting of the board of directors of Chesapeake Bay Corporation, a developer of moderate-priced homes and vacation homes in the Chesapeake Bay area. The combinat...

Q: Explain the circumstances under which debt financing will increase the return on

Explain the circumstances under which debt financing will increase the return on common stockholders’ equity.

Q: At year-end 2015, Wallace Landscaping’s total assets were $

At year-end 2015, Wallace Landscaping’s total assets were $2.17 million and its accounts payable were $560,000. Sales, which in 2015 were $3.5 million, are expected to increase by 35% in 2016. Total a...

Q: What are the primary sources of debt financing for most large companies

What are the primary sources of debt financing for most large companies?

Q: Maxima Corporation, a U.S. company, manufactures lighting

Maxima Corporation, a U.S. company, manufactures lighting fixtures and ceiling fans. Eight years ago, it set up a subsidiary in Mexico to manufacture three of its most popular ceiling fan models. When...

Q: Why is the use of debt financing referred to as financial “

Why is the use of debt financing referred to as financial “leverage”?

Q: 1. Who elects a corporation’s board of directors? a

1. Who elects a corporation’s board of directors? a. Preferred stockholders b. Common stockholders c. The corporation’s top executives d. The corporation’s employees 2. A stock split a. always guaran...

Q: Frankton Corporation has experienced difficult financial times for the past five years

Frankton Corporation has experienced difficult financial times for the past five years resulting in serious cash flow problems, negative earnings, and increasing deficits in retained earnings. The neg...

Q: Which of the following statements most appropriately describes how agency costs affect

Which of the following statements most appropriately describes how agency costs affect a firm’s choice of capital structure? Explain. a. When firm owners borrow money, they have an incentive to engage...

Q: Wingate Metal Products, Inc. sells materials to contractors who construct

Wingate Metal Products, Inc. sells materials to contractors who construct metal warehouses, storage buildings, and other structures. The firm has estimated its weighted average cost of capital to be 9...

Q: In May of this year Newcastle Mfg. Company’s capital investment review

In May of this year Newcastle Mfg. Company’s capital investment review committee received two major investment proposals. One of the proposals was issued by the firm’s domestic manufacturing division,...

Q: Saddle River Operating Company (SROC) is a Dallas-based

Saddle River Operating Company (SROC) is a Dallas-based independent oil and gas firm. In the past, the firm’s managers have used a single firm-wide cost of capital of 11 percent to evaluate new invest...

Q: Nealon Energy Corporation engages in the acquisition, exploration, development,

Nealon Energy Corporation engages in the acquisition, exploration, development, and production of natural gas and oil in the continental United States. The company has grown rapidly over the last 5 ye...

Q: Dana Harbert recently started a very successful small business. Indeed,

Dana Harbert recently started a very successful small business. Indeed, the business had grown so rapidly that she was no longer able to finance its operations by investing her own resources in the bu...

Q: Your friend has recently told you that the federal government effectively subsidizes

Your friend has recently told you that the federal government effectively subsidizes the use of debt financing (vs. equity financing) for corporations. Do you agree with that statement? Explain?

Q: Mike’s T-Shirts, Inc., has debt claims of $

Mike’s T-Shirts, Inc., has debt claims of $400 (market value) and equity claims of $600 (market value). If the after-tax cost of debt financing is 11 percent and the cost of equity is 17 percent, then...

Q: You are analyzing a firm that is financed with 60 percent debt

You are analyzing a firm that is financed with 60 percent debt and 40 percent equity. The current cost of debt financing is 10 percent, but due to a recent downgrade by the rating agencies, the firm’s...

Q: Are taxes necessary for the cost of debt financing to be less

Are taxes necessary for the cost of debt financing to be less than the cost of equity financing?

Q: Alpha Company is looking at two different capital structures, one an

Alpha Company is looking at two different capital structures, one an all-equity firm, and the other a leveraged firm with $2,000,000 of debt financing at 8% interest. The all-equity firm will have $4,...

Q: 1. The Statement of Cash Flows (SCF) shows all

1. The Statement of Cash Flows (SCF) shows all sources and uses of a business’s funds resulting from operating, A. investing, and financing activities B. investing, and equity funding activities C. eq...

Q: Part I Debby Kauff man and her two colleagues, Jamie Hiatt

Part I Debby Kauff man and her two colleagues, Jamie Hiatt and Ella Rincon, are personal trainers at an upscale health spa/resort in Tampa, Florida. They want to start a health club that specializes i...

Q: 1. Which of the following businesses is the least likely to

1. Which of the following businesses is the least likely to be operated as a partnership? a. accounting firm b. doctors ’ office c. lawyers ’ office d. steel foundry 2. Which of the following statemen...

Q: High Sky Inc., a hot-air balloon manufacturing firm,

High Sky Inc., a hot-air balloon manufacturing firm, currently has the following simplified balance sheet: The company is planning an expansion that is expected to cost $600,000. The expansion can b...

Q: The Anaya Corporation is a leader in artificial intelligence research. Anaya’s

The Anaya Corporation is a leader in artificial intelligence research. Anaya’s present capital structure consists of common stock (30 million shares) and debt ($250 million with an interest rate of 15...

Q: Jenkins Products has a current capital structure that consists of $50

Jenkins Products has a current capital structure that consists of $50 million in longterm debt at an interest rate of 10 percent and $40 million in common equity (10 million shares). The firm is consi...

Q: The Oakland Shirt Company has computed its indifference level of EBIT to

The Oakland Shirt Company has computed its indifference level of EBIT to be $500,000 between an equity financing option and a debt financing option. Interest expense under the debt option is $200,000...

Q: Bowaite’s Manufacturing has a current cash and marketable securities balance of $

Bowaite’s Manufacturing has a current cash and marketable securities balance of $50 million. The company’s economist is forecasting a two-year recession. Free cash flows during the recession, which ar...

Q: University Technologies, Inc. (UTI) has a current capital

University Technologies, Inc. (UTI) has a current capital structure consisting of 10 million shares of common stock, $200 million of first-mortgage bonds with a coupon interest rate of 13 percent, and...

Q: Ellington’s Cabaret is planning a major expansion that will require $95

Ellington’s Cabaret is planning a major expansion that will require $95 million of new financing. Ellington’s currently has a capital structure consisting of $400 million of common equity (with a cost...

Q: On the basis of your answers to Problems 22-1 and

On the basis of your answers to Problems 22-1 and 22-2, indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition. Data from Problems 22-1...

Q: David Lyons, CEO of Lyons Solar Technologies, is concerned about

David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not us...

Q: At year-end 2016, Wallace Landscaping’s total assets were $

At year-end 2016, Wallace Landscaping’s total assets were $2.17 million, and its accounts payable were $560,000. Sales, which in 2016 were $3.5 million, are expected to increase by 35% in 2017. Total...

Q: Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will

Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 thro...

Q: Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will

Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 thro...

Q: You have developed the following pro forma income statement for your corporation

You have developed the following pro forma income statement for your corporation. It represents the most recent year’s operations, which ended yesterday. Your supervisor in the con...

Q: In Regardless of Your Major: Capital Structure Matters to You!

In Regardless of Your Major: Capital Structure Matters to You! on page 484, we learned about the dangers of using a high proportion of debt financing faced by both General Motors (GM) and Lehman Broth...

Q: How does the presence of financial distress costs, combined with the

How does the presence of financial distress costs, combined with the tax deductibility of interest (and the resulting interest tax savings), affect a firm’s weighted average cost of capital as the fir...

Q: Bell Jewelers wishes to explore the effect on its cost of capital

Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 40% debt, 10% preferred stock, and 50%...

Q: 1. What is the invested capital given the following? Accounts

1. What is the invested capital given the following? Accounts receivable = $50,000; current assets = $200,000; total assets = $700,000; shareholders’ equity = $450,000; accounts payable = $10,000; sho...

Q: At year-end 2018, Wallace Landscaping’s total assets were $

At year-end 2018, Wallace Landscaping’s total assets were $2.17 million, and its accounts payable were $560,000. Sales, which in 2018 were $3.5 million, are expected to increase by 35% in 2019. Total...

Q: Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will

Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 throu...

Q: Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will

Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vanell’s free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 throu...

Q: Although the major benefit of debt financing is easy to observe—

Although the major benefit of debt financing is easy to observe—the tax shield—many of the indirect costs of debt financing can be quite subtle and difficult to observe. Describe some of these costs....

Q: We R Toys” (WRT) is considering expanding into new

We R Toys” (WRT) is considering expanding into new geographic markets. The expansion will have the same business risk as WRT’s existing assets. The expansion will require an initial investment of $50...

Q: 1. All else the same, as a firm’s use of

1. All else the same, as a firm’s use of nondebt tax shields rises, the firm’s use of debt will most likely do which of the following? a. Decline b. Not change c. Rise d. Theory doesn’t give us any gu...

Q: Big 10+1 Corp. intends to raise $5 million

Big 10+1 Corp. intends to raise $5 million by one of two financing plans: Plan A: Sell 1,250,000 shares at $4 per share net to the firm. Plan B: Issue $5 million in ten year debentures with a 9 percen...

Q: As Cecil shuffled through the stack of files on his desk and

As Cecil shuffled through the stack of files on his desk and clicked away on his mouse, his mind kept racing back to what Jason, his boss, had said to him at the last budget meeting. “We can only fund...

Q: Mr. Landman has spent the last 10 years developing small commercial

Mr. Landman has spent the last 10 years developing small commercial strip malls and has been very successful. He buys a residential property in a high-traffic area, rezones the property, and then sell...

Q: P Co. is looking for some additional financing in order to

P Co. is looking for some additional financing in order to renovate one of the company's manufacturing plants. It is having difficulty getting new debt financing because its debt-to-equity ratio is hi...

Q: Callie Peters is completing the audit of MakingNewFriends.com for the

Callie Peters is completing the audit of MakingNewFriends.com for the year ended December 31, 2019. Callie has been the audit manager on this engagement for the past three years. MakingNewFriends.com...

Q: Newrock Manufacturing Inc. has the following target capital structure

Newrock Manufacturing Inc. has the following target capital structure Investment bankers have advised the CFO that the company could raise up to $5 million in new debt financing by issuing bonds at...

Q: An entity has $660 000 of assets, including current assets

An entity has $660 000 of assets, including current assets of $180 000. The following information has also been ascertained about the entity. • The two owners have contributed $150 000 each. • The ent...

Q: Managers from different departments in Bensen Systems, a large multinational corporation

Managers from different departments in Bensen Systems, a large multinational corporation, have offered seven projects for consideration by the corporate office. A staff member for the chief financial...

Q: Your boss, whose background is in financial planning, is concerned

Your boss, whose background is in financial planning, is concerned about the company’s high weighted average cost of capital of 21%. He has asked you to determine what combination of debt equity finan...

Q: The cash flow plan associated with a debt financing transaction allowed a

The cash flow plan associated with a debt financing transaction allowed a company to receive $2,800,000 now in lieu of future interest payments of $196,000 per year for 10 years plus a lump sum of $2,...

Q: Tri-States Gas Producers expects to borrow $800,000

Tri-States Gas Producers expects to borrow $800,000 for field engineering improvements. Two methods of debt financing are possible—borrow it all from a bank or issue debenture bonds. The company will...

Q: Why is it financially unhealthy for an individual to maintain a large

Why is it financially unhealthy for an individual to maintain a large percentage of debt financing over a long period of time, that is, to be highly leveraged?

Q: State whether each of the following involves debt financing or equity financing

State whether each of the following involves debt financing or equity financing: (a) A bond issue for $3,500,000 by a city-owned Utility (b) An initial public offering (IPO) of $35,000,000 in common s...

Q: TrvlSafe, a manufacturer of air-freightable pet crates with imbedded

TrvlSafe, a manufacturer of air-freightable pet crates with imbedded chips to monitor the health of the pet, has identified two projects that have relatively high risk; however, they are expected to m...

Q: The engineer must make a recommendation on the financing plan by the

The engineer must make a recommendation on the financing plan by the end of the day. He does not know how to consider all the tax angles for the debt financing in plan A. However, he does have a handb...

Q: The division manager would like to know how much the WACC varies

The division manager would like to know how much the WACC varies for different D-E mixes, especially about 15% to 20% on either side of the 50% debt financing option in plan A. Plot the WACC curve and...

Q: Davidson Yachts is a small private company founded by two businesspeople who

Davidson Yachts is a small private company founded by two businesspeople who are friends and avid sailors. At present, they are interested in expanding the business and have asked you to review its fi...

Q: Refer to the information in Problem 20-49 for the Davidson

Refer to the information in Problem 20-49 for the Davidson Yachts Company. Required: 1. What is the valuation of Davidson Yachts Company using the book value of equity method? 2. What is the valuatio...

Q: Barry Bowtie incorporated his business under the name BowTie Fishing Expeditions Corp

Barry Bowtie incorporated his business under the name BowTie Fishing Expeditions Corp. on March 1, 2020. It was authorized to issue 30,000 $2 cumulative preferred shares and an unlimited number of com...

Q: American Laser, Inc., reported the following account balances on January

American Laser, Inc., reported the following account balances on January 1. The company entered into the following transactions during the year. Required: 1. Analyze the effects of each transaction...

Q: You work for a public company that has relied heavily on debt

You work for a public company that has relied heavily on debt financing in the past and is now considering a preferred stock issuance to reduce its debt-to-assets ratio. Debtto-assets is one of the ke...

Q: A common problem facing any business entity is the debt versus equity

A common problem facing any business entity is the debt versus equity decision. When funds are required to obtain assets, should debt or equity financing be used? This decision also is faced when a co...

Q: Wizard, Inc., has a subsidiary in a country where the

Wizard, Inc., has a subsidiary in a country where the government allows only a small amount of earnings to be remitted to the United States each year. Should Wizard finance the subsidiary with debt fi...

Q: LaSalle Corp. is a U.S.-based MNC with

LaSalle Corp. is a U.S.-based MNC with subsidiaries in various less developed countries where stock markets are not well established. How can LaSalle still achieve its “global” target capital structur...

Q: Walmart Stores, Inc. (Walmart) is the largest retailing

Walmart Stores, Inc. (Walmart) is the largest retailing firm in the world. Building on a base of discount stores, Walmart has expanded into warehouse clubs and Supercenters, which sell traditional dis...

Q: Recall that Carson Company relies heavily on commercial banks for loans.

Recall that Carson Company relies heavily on commercial banks for loans. When the company was first established with equity funding from its owners, Carson could easily obtain debt financing, because...

Q: Carson Company has sometimes relied on debt financing from Fente Finance Company

Carson Company has sometimes relied on debt financing from Fente Finance Company. Fente has been willing to lend money even when most commercial banks were not. Fente obtains funding by issuing commer...

Q: Carson Company is a large manufacturing firm in California that was created

Carson Company is a large manufacturing firm in California that was created 20 years ago by the Carson family. It was initially financed with an equity investment by the Carson family and ten other in...

Q: Recall that Carson Company has obtained substantial loans from finance companies and

Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate on these loans are tied to the six-month Treasury bill rate (and includes a ris...

Q: Refer to the financial statements of Target (Appendix B) and

Refer to the financial statements of Target (Appendix B) and Walmart (Appendix C) and the Industry Ratio Report (Appendix D) at the end of this book. Required: 1. Compute the debt-to-equity ratio for...

Q: Sander Persaud is an audit manager for a national public accounting firm

Sander Persaud is an audit manager for a national public accounting firm. Every summer, the firm recruits several university students as interns. One such intern is Taylor Jay, a high-performing stude...

Q: Quantum Research Ltd. has arranged debt financing from its parent company

Quantum Research Ltd. has arranged debt financing from its parent company to complete the development of a new product. Quantum “draws down” $12,000 at the beginning of each month. If interest accumul...

Q: A company has 50% less equity financing than debt financing.

A company has 50% less equity financing than debt financing. What percentage of the equity is the debt? What percentage more debt financing than equity financing does the company have?

Q: Compare the advantages and disadvantages of debt and equity financing, and

Compare the advantages and disadvantages of debt and equity financing, and explain the two major considerations in choosing from financing alternatives. (1) What factors might lead a company to gain a...

Q: Could Visa have accomplished its funding goals through short-term or

Could Visa have accomplished its funding goals through short-term or long-term debt financing instead? Why or why not?

Q: Suppose that Tale Inc. has the following target capital structure:

Suppose that Tale Inc. has the following target capital structure: 50 percent stock, 40 percent debt, and 10 percent preferred stock. Its cost of equity is estimated at 10 percent, that of debt 6 perc...