Alpha company is looking at two different capital structures, one an all-equity firm and the other a leverages firm with $4.32 million of debt financing at 11% interest. The all-equity firm will have a value of $7.2 million and 360,000 shares outstanding. The leveraged firm will have 144,000 shares outstanding.
a. Find the break even EBIT for Alpha company using EPS if there are no corporate taxes.
b.Find the break even EBIT for Alpha company using EPS if the corporate tax rate is 40%
c. What do you notice about these two break-even EBITs for Alpha company?
Finding the WACC
Monica is the CFO of Cooking for Friends (CFF) and uses the pecking order hypothesis philosophy when she raises capital for company projects. Currently, she can borrow up to $500,000 from her bank at a rate of 7.75%, float a bond for $800,000 at a rate of 9.25%, or issue additional stock for $1,300,000 at a cost of 18%. What is the WACC for CFF if Monica chooses to invest:
a. $1,000,000 in new projects
b. $1,800,000 in new projects
c. $2,600,000 in new projects
Finding the WACC
Monica is the CFO of Cooking for Friends (CFF) and uses the pecking order hypothesis philosophy when she raises capital for company projects. Currently, she can borrow up to $500,000 from her bank at a rate of 8%, float a bond for $750,000 at a rate of 9.25%, or issue additional stock for $1,400,000 at a cost of 15%. Chandler has been hired by CFF to raise capital for the company. Chandler increases the funding available from the bank to $1,050,000, but with a new rate of 8.5%. what is the WACC is for borrowing
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