Requirements Advantages Disadvantages Application process Credit check Term Options Other The Debt-to-Equity Ratio The Optimal Capital Structure a) Firm Value and Stock Value b) Capital Structure and the Cost of Capital How Financial Leverage Affects the EPS and ROE of a Firm How Interest Rates Affect the Demand for Debt and Equity Capital VI. VII. VIII. The Significance of Credit Ratings for Capital Structure a) Regulations on Bond Investment b) Information Content of Ratings c) Costs Directly Imposed
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a. (1) In this case study‚ Stanley’s focus is on maximizing profits. Yes he is correct. This should be the goal of any firm and any financial manager. He should be easily able to maximize the value and also extend the wealth of the shareholders or stockholders if he continues to maximize profits. (2) There is always potential for any agency problem. Should Stanley decide to invest in the software developer‚ an investment of this nature could cause decrease in earnings per share for
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CHAPTER 12 QUESTIONS 12-1 Operating leverage affects EBIT and‚ through EBIT‚ EPS. Financial leverage generally has no effect on EBIT—it only affects EPS‚ given EBIT. 12-2 Because Firm A has a higher fixed operating costs‚ its operating income will change by a greater percentage than Firm B’s operating income if sales change. Firm A has a higher degree of operating leverage than Firm B. 12-3 If sales tend to fluctuate widely‚ then cash flows and the ability to service fixed charges
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are not the most applicable for the firm long-term growth. I would say that BKI justification of not using debt in its capital structure was to avoid any risk. But the fact is that BKI management debt free strategy is not in any way helping BKI to maximizing its value. As it had always been the case with other well-performing Small Cap and Mid Cap companies‚ a reasonable level of debt in a given company capital structure helps lower the cost of capital partly‚ due to tax reduction. I would recommend
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D’s Dang Cameras Jordan Beadle Esperanza Benitez David Dang Sean Kelly Thom Thurn Strategy Formulation and Initial Implementation Our company wanted to appeal to as many consumers as possible and gain market share through value and competitive cost. We realized that not every person would need an extremely high end camera to capture life’s simple moments‚ but consumers would still appreciate a high value product without the intimidating features of some highend cameras. We chose to
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company originally seemed to pride itself in not incurring debt it’s evident that it has long-term affects on the value of the firm. * Whether they considered that less debt would provide them with less risk or not‚ the fact is that they are not maximizing the value of their firm completely by staying away from debt financing. Although risk will increase when their debt increases‚ debt financing will lower the cost of capital primarily due to tax reduction. The firm will never reach their full potential
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Which of the following statements is not true regarding the goal of financial management? The goal of maximizing the value per share of existing stock is relevant to all organizations. A way of aligning management goals to shareholder’s interest is to tie managerial compensation to the market value of the firm’s stock. For a company considering international operations‚ the goal will be the same but the company will have to consider the local social‚ economical and political
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INTRODUCTION A financial management system is the methodology and software that an organization uses to oversee and govern its income‚ expenses‚ and assets with the objective of maximizing profits and ensuring sustainability. It is concerned with the procurement and use of funds with an aim to use business funds in such a way that the firm’s value and earnings are maximized. It also provides a frame work for selecting a proper course of action and deciding a viable commercial strategy
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is that the objective of the firm is to maximize the wealth of its stockholders." Brigham and Gapenski: Throughout this book we operate on the assumption that the management’s primary goal is stockholder wealth maximization which translates into maximizing the price of the common stock. Aswath Damodaran 4 The Objective in Decision Making In traditional corporate finance‚ the objective in decision making is to maximize the value of the firm. A narrower objective is to maximize stockholder
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all of the required capital by issuing debt‚ what would the impact be on the firm’s shareholders? The impact on shareholders can be analyzed by calculating the EPS and ROE of the firm under the alternative scenarios as follows: All Debt With $5‚000‚000 Expansion Current Growth in Revenues Revenues EBIT Interest EBT EBT*(1-T) # of shares EPS Debt Equity Debt/Equity Ratio Return on Equity 15‚000‚000 2‚250‚000 0 2‚250‚000 1‚350‚000 1‚000‚000 1.35 0 15‚000‚000 0.00% 9.00% Worst Case 10% 16‚500‚000 2‚475
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