Capital Structure Exercise
Capital Structure Practice Problems
1. Hayfin Enterprises has the following operating results and capital structure:
Hayfin Enterprises ($000s) | | | Financial Data | | Revenue | $ 6,000 | Operating Expenses | $ (4,500) | EBIT (Operating Profit) | $ 1,500 | | | Debt | $ 1,200 | Equity | $ 8,800 | Total Capital | $ 10,000 |
Interest rate on debt = 9%
Share price = $25 (MV = BV)
The firm is contemplating a leveraged share repurchase that would increase the Debt/Total Capital ratio from the current 12% to 60%. Hayfin’s tax rate is 42%.
Calculate EPS, Times Interest Earned (TIE = EBIT/Interest Expense), and ROE under the current and proposed capital structures. You can assume that the change in equity due to lower retained earnings is negligible. Thus, the only change is dent and equity is due to the change in the leverage ratio.
2. The preliminary 2013 financial forecast for the Janvier Hat Company is shown below:
Janvier Hat Company ($000s)
Assume the interest rate on debt is 12% and that interest expense is calculated on year-end balances. Also assume the market value and book value of Janvier’s shares are equal.
Calculate the following for the 2013 forecast:
EPS: _________ Debt/Total Capital: _______ TIE: _______ ROE:_______
Now assume Janvier is considering adding more debt in 2013. Their banker feels that the minimum TIE ratio lenders would accept is 4.0X. What will the new capital structure look like if Janvier’s 2013 forecast has a TIE of exactly 4.0X? How many shares will be outstanding after the transaction? Calculate the metrics shown below for the new capital structure.
Shares Outstanding: ________
EPS: _________ Debt/Total Capital: _______ TIE: _______
1. Hayfin Enterprises has the following operating results and capital structure:
Hayfin Enterprises ($000s) | | | Financial Data | | Revenue | $ 6,000 | Operating Expenses | $ (4,500) | EBIT (Operating Profit) | $ 1,500 | | | Debt | $ 1,200 | Equity | $ 8,800 | Total Capital | $ 10,000 |
Interest rate on debt = 9%
Share price = $25 (MV = BV)
The firm is contemplating a leveraged share repurchase that would increase the Debt/Total Capital ratio from the current 12% to 60%. Hayfin’s tax rate is 42%.
Calculate EPS, Times Interest Earned (TIE = EBIT/Interest Expense), and ROE under the current and proposed capital structures. You can assume that the change in equity due to lower retained earnings is negligible. Thus, the only change is dent and equity is due to the change in the leverage ratio.
2. The preliminary 2013 financial forecast for the Janvier Hat Company is shown below:
Janvier Hat Company ($000s)
Assume the interest rate on debt is 12% and that interest expense is calculated on year-end balances. Also assume the market value and book value of Janvier’s shares are equal.
Calculate the following for the 2013 forecast:
EPS: _________ Debt/Total Capital: _______ TIE: _______ ROE:_______
Now assume Janvier is considering adding more debt in 2013. Their banker feels that the minimum TIE ratio lenders would accept is 4.0X. What will the new capital structure look like if Janvier’s 2013 forecast has a TIE of exactly 4.0X? How many shares will be outstanding after the transaction? Calculate the metrics shown below for the new capital structure.
Shares Outstanding: ________
EPS: _________ Debt/Total Capital: _______ TIE: _______