(Calculating capital structure weights) The common stock of Moe's Restaurant is currently selling for 575 per share, has a book value of $65 per share, and there are 1.07 million shares of common stock outstanding. In addition, the firm also has 115,000 bonds outstanding with a par value of $1,000 that are selling at 112 percent of par. What arc the capital structure weights that Moe's should use to analyze its capital structure?
(Calculating capital structure weights) Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. Ojai's balance sheet indicates that the firm has $48.02 million in total liabilities. Ojai has only $40.48 million in short- and long-term debt on its balance sheet. I lowever, because interest rates have fallen dramatically since the debt was issued, Ojai's short- and long-term debt has a current market price that is 10 percent over its book value or 544.53 million. The book value of Ojai's common equity is S49.55 million but the market value of the equity is currently SI00.47 million.
a. What is Ojai's debt ratio and interest-bearing debt ratio calculated using book values?
b. What is Ojai's debt-to-enterprise-value ratio calculated using the market values of the firm's debt and equity and assuming excess cash is zero?
c. If you were trying to describe Ojai's capital structure to a potential lender (i.e., a bank), would you use the book-value-based debt ratio or the market-value-based debt-to-enterprise-value ratio?
(Computing interest tax savings) Dharma Supply has earnings before interest and taxes (EBIT) of S566,000, interest expenses of $317,000, and faces a corporate tax rate of 34 percent.
a. What is Dharma Supply's net income?
b. What would Dharma's net income be if it didn't have any debt (and consequently no interest expense)?
c. What are the firm's interest tax savings?
(Related to Checkpoint 15.2) (EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed:
• Plan A is an all-common-equity structure in which $2.4 million dollars would be raised by selling 84,000 shares of common stock.
• Plan B would involve issuing S1.1 million in long-term bonds with an effective interest rate of 11.6 percent plus another 51.3 million would be raised by selling 42,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm's capital structure.
Abe and his partners plan to use a 38 percent tax rate in their analysis, and they have hired you on a consulting basis to do the following:
a. Find the EBIT indifference level associated with the two financing plans.
b. Prepare a pro forma income statement for the EBIT level solved for in part a that shows that EPS will be the same regardless whether Plan A or B is chosen.
(EBIT-EPS break-even analysis) Home Depot, Inc. (I ID) had 1.70 billion shares of common stock outstanding in 2008, whereas Lowes Companies, Inc. (LOW) had 1.46 billion shares outstanding. Assuming Home Depot's 2008 interest expense is 5696 million, Lowes' interest expense is $239 million, and a 38 percent tax rate for both firms, what is their break-even level of operating income (i.e., the level of EBIT where EPS is the same for both firms)?