Posted: February 19th, 2022
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BENCHMARK MINI CASE 1
The purpose of this assignment is to analyze afirm’s capital structure and its impact on firm performance. Within theassignment, explain core concepts related to business risk and recommend soundfinancial decisions based on analysis of a firm’s capital structure and capitalbudgeting techniques.
Read the Chapter 15 Mini Case in FinancialManagement: Theory and Practice. Using complete sentences and academicvocabulary, please answer questions a and b.
Using the mini case information, write a 250word recommendation of the financial decisions you propose for this companybased on an analysis of its capital structure and capital budgeting techniques.Explain why you chose this recommendation.
This assignment uses a rubric. Please reviewthe rubric prior to beginning the assignment to become familiar with theexpectations for successful completion. You are required to submit thisassignment to LopesWrite. Refer to the for assistance.
Assume you have just been hired as a business manager ofPizzaPalace, a regional pizza restaurant chain. The companys EBIT was $120million last year and is not expected to grow. PizzaPalace is in the 25% state-plus-federaltax bracket, the risk-free rate is 6 percent, and the market risk premium is 6percent. The firm is currently financed with all equity, and it has 10 millionshares outstanding.
When you took your corporate finance course, your instructorstated that most firms owners would be financially better off if the firmsused some debt. When you suggested this to your new boss, he encouraged you topursue the idea. If the company were to recapitalize, then debt would beissued, and the funds received would be used to repurchase stock. As a firststep, assume that you obtained from the firms investment banker the followingestimated costs of debt for the firm at different capital structures:
a) Using the free cash flow valuation model, showthe only avenues by which capital structure can affect value.
(1) What is business risk? What factors influence afirms business risk?
(2) What is operating leverage, and how does itaffect a firms business risk? Show the operating break-even point if a companyhas fixed costs of $200, a sales price of $15, and variable costs of $10.
Answer to question A is extremelythorough and supported with substantial relevant details.
Answer to question B is extremelythorough and supported with substantial relevant details.
Analysisof Firm’s Capital Structure and Impact on Performance (C5.1)
An analysis of a firm’s capitalstructure and its impact on the firm’s performance is extremely thorough andsupports with substantial relevant details.
FinancialDecisions (C3.1; C9.1)
Recommendations for proposedfinancial decisions based on analysis of capital structure and capital budgetingtechniques are extremely thorough and include substantial supporting detailsand examples.
BENCHMARK MINI CASE 2
Integrated Waveguide Technologies (IWT) is a 6-year-oldcompany founded by Hunt Jackson and David Smithfield to exploit metamaterialplasmonic technology to develop and manufacture miniature microwave frequencydirectional transmitters and receivers for use in mobile Internet andcommunications applications. IWTs technology, although highly advanced, isrelatively inexpensive to implement, and its patented manufacturing techniquesrequire little capital as compared to many electronics fabrication ventures.Because of the low capital requirement, Jackson and Smithfield have been ableto avoid issuing new stock and thus own all of the shares. Because of theexplosion in demand for its mobile Internet applications, IWT must now accessoutside equity capital to fund its growth, and Jackson and Smithfield havedecided to take the company public. Until now, Jackson and Smithfield have paidthemselves reasonable salaries but routinely reinvested all after-tax earningsin the firm, so dividend policy has not been an issue. However, before talkingwith potential outside investors, they must decide on a dividend policy.
Your new boss at the consulting firm Flick and Associates,which has been retained to help IWT prepare for its public offering, has askedyou to make a presentation to Jackson and Smithfield in which you review thetheory of dividend policy and discuss the following issues.
What do the three theories indicate regarding the actionsmanagement should take with respect to dividend payouts?
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