Module 4 – Case
CAPITAL STRUCTURE AND DIVIDENDS
Case Assignment
Analyzing a Firm’s Capital Structure
Mr. Hillbrandt has learned a lot about the financial side of
running the business during the first year with the company and is now
contemplating making changes to the corporate capital structure. He needs your
assistance one more time.
ABC Golf Equipment Corporation has $10 million in assets
(where the market value of the assets is equal to the book value of the assets)
and no debt. The company’s marginal tax
rate is currently 35% and has 500,000 shares outstanding. The company’s earnings before interest and
taxes (EBIT) are $3.88 million. The
firm’s stock price is $27 per share and the cost of equity is 11%.
The company is thinking of issuing bonds and simultaneously
repurchasing a portion of its stock. If
the company changes its capital structure from no debt to 25% debt based on
market values, the firm’s cost of equity will increase to 13% because of the
increased risk. The bonds can be sold at
a cost of 9%. The firm’s earnings are
not expected to grow over time. All of
its earnings will be paid out as dividends.
Probability
EBIT ($)
0.05
– 1 million
0.25
2.3 million
0.40
4 million
0.25
5.8 million
0.05
6.1 million
Required:
Computations (use Excel).
Make the computations necessary to answer the questions
below. Don’t forget that Mr. Hillbrandt does appreciate your step-by-step
computations to guide him through the analysis.
What impact will this utilization of this debt have on the
value of the company?
What’s going to be the company’s EPS after the
recapitalization?
What’s going to be the company’s new stock price?
The $3.88 million EBIT discussed above is determined from
this probability distribution.
What’s the times interest earned ratio at each probability
level?
Memo (use Word).
Interpret the analysis already prepared and use the Excel
computations as a basis for a memo to the CEO. Write a four or five paragraph
memo. Make sure each question listed above is addressed. Start with an
introduction and end with a recommendation. Each of the four or five paragraphs
should have a heading.
Short Essay (use Word).
Do research to determine some significant considerations
that go into selecting or changing the capital structure of a corporation. Start
with an introduction and end with a summary or conclusion. Use headings. Don’t
forget to reference your sources. Maximum length of two pages.
Assignment Expectations
Each submission should include two files: (1) An Excel file;
and (2) A Word document. The Word document shows the memo first and short essay
last. Assume a knowledgeable business audience and use required format and
length. Individuals in business are busy and want information presented in an
organized and concise manner.
Module 4 – SLP
CAPITAL STRUCTURE AND DIVIDENDS
Analyzing the Dividend Policies of Various Companies
Please recall the company that you selected for the Module 1
SLP. Please review the company’s dividends over the past three years. Then, answer the following questions in Word
(except for the Excel portion specifically noted):
What has occurred with company’s dividend payout, dividend
yield, and dividend per share over the past three years? Do you have any explanations for what has
occurred?
How does your selected company’s dividend payout, dividend
yield, and dividend per share compare to other companies in its industry? Has the company’s dividend strategy been
similar to other companies in its industry?
You are now to use Excel and plot your selected company’s
earnings and dividends over the past three years. Do you notice any patterns?
What is your estimate for your company’s dividend per share
next year? Please justify why you made
that decision.
Now locate a company that has reduced or eliminated its
common stock cash dividend over the past year.
Why did the company reduce or eliminate its dividend? What has happened to the company’s stock
price over the year?
SLP Assignment Expectations
You are expected to:
Describe the purpose of the report and provide a conclusion.
An introduction and a conclusion are important because many busy individuals in
the business environment may only read the first and the last paragraph. If
those paragraphs are not interesting, they never read the body of the paper.
Answer the SLP Assignment question(s) clearly and provide
necessary details.
Write clearly and correctly—that is, no poor sentence
structure, no spelling and grammar mistakes, and no run-on sentences.
Provide citations to support your argument and references on
a separate page. (All the sources that you listed in the references section
must be cited in the paper.) Use APA format to provide citations and
references.
Type and double-space the paper.
Whenever appropriate, please use Excel to show supporting
computations in an appendix, present financial information in tables, and use
the data computed to answer follow-up questions. In finance, in addition to being able to
write well, it’s important to present information in a professional manner and
to analyze financial information. This is part of the assignment expectations
and will be considered for grading purposes.
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