# Assessment 8 instructions: capital structure and financial health

Save Time On Research and Writing
Hire a Pro to Write You a 100% Plagiarism-Free Paper.

Complete four problems evaluating optimal capital structure and the financial health of a firm, addressing optimal capital structure, break-even analysis, WACC and optimal capital structure, and cost of trade credit and bank loan.

#### Introduction

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

• Competency 2: Evaluate the financial health of the firm.
• Formulate the break-even analysis.
• Calculate cost of trade credit and bank loan.
• Competency 4: Evaluate optimal capital structure.
• Calculate the optimal capital structure.
• Calculate the WACC and optimal capital structure.

#### Instructions

For this assessment, complete Problems 1–4 evaluating optimal capital structure and the financial health of a firm. You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet. In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer. Note the following:

• You may need an HP 10B II business calculator.
• You may use Word or Excel, but you will find Excel to be most helpful for creating spreadsheets.
• If you choose to solve the problems algebraically, be sure to show your computations.
• If you use a financial calculator, show your input values.
• If you use an Excel spreadsheet, show your input values and formulas.
##### Problem 1: Optimal Capital Structure

XYZ Inc. is setting its target capital structure. The CFO of XYZ Inc. believes that the optimal debt-to-capital ratio is between 25 percent and 60 percent. Her staff derived following the projections. Various debt levels were considered.

Save Time On Research and Writing
Hire a Pro to Write You a 100% Plagiarism-Free Paper.

Debt/Capital Ratio Projected EPS Projected Stock PriceDept/Capital RatioProjected EPSProjected Stock Price25%\$4.20\$40.0035%\$4.45\$41.5045%\$4.75\$41.2560%\$4.50\$40.59

Assuming that the firm uses only debt and common equity, what is XYZ’s optimal capital structure? At what debt-to-capital ratio is the company’s WACC minimized?

##### Problem 2: Break-Even Analysis

XYZ Inc. sells photoframes for \$20 each. The fixed costs are \$60,000, and variable costs are \$7 per photoframe.

1. What is the firm’s gain or loss at sales of 6,000 photoframes? At 15,000 photoframes?
2. How would the break-even point be affected if the selling price was raised to \$25? How is this analysis significant?
3. If the selling price was raised to \$25 but variable costs rose to \$13 a unit, what would happen to the break-even point?
##### Problem 3: WACC and Optimal Capital Structure

This problem is easiest to complete in Excel. Structure consists of only debt and common equity. XYZ’s finance department staff created the following table showing the firm’s debt cost at different debt levels:

Debt-to-Capital RatioEquity-to-Capital RatioDebt-to-Equity RatioBond RatingBefore-Tax Cost of Debt0.01.00.00A6.0%0.20.80.25BBB7.0%0.40.60.67BB9.0%0.60.41.50C11.0%0.80.24.00D14.0%

XYZ uses the CAPM to estimate its cost of common equity and estimates that the risk-free rate is 4 percent, the market risk premium is 7 percent, and its tax rate is 35 percent. XYZ estimates that if it had no debt, its “unlevered” beta would be 1.5.

1. What would be its WACC at the optimal capital structure? What would the firm’s optimal capital structure be?
2. If XYZ’s managers anticipate that the company’s business risk will increase in the future, what effect would this likely have on the firm’s target capital structure?
3. If Congress were to dramatically increase the corporate tax rate, what effect would this likely have on XYZ’s target capital structure?
##### Problem 4: Cost of Trade Credit and Bank Loan

XYZ Inc. buys \$10 million of materials (net of discounts) on terms of 3/5, net 60, and it currently pays on the 5th day and takes discounts. XYZ plans to expand, which will mean additional financing.

1. If XYZ decides to forgo discounts, could it obtain much additional credit?
2. What would be the nominal and effective cost of that credit?
3. What would be the effective cost of the bank loan if the company could get the funds from a bank at a rate of 8 percent and if the interest was paid monthly? All of this should be based on a 365-day year.
4. Should XYZ use bank debt or additional trade credit? Explain.

#### Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

• Competency 2: Evaluate the financial health of the firm.
• Formulate the break-even analysis.
• Calculate cost of trade credit and bank loan.
• Competency 4: Evaluate optimal capital structure.
• Calculate the optimal capital structure.
• Calculate the WACC and optimal capital structure.

Basic features
• Free title page and bibliography
• Unlimited revisions
• Plagiarism-free guarantee
• Money-back guarantee
• 24/7 support
On-demand options
• Writer’s samples
• Part-by-part delivery
• Overnight delivery
• Copies of used sources
• Expert Proofreading
Paper format
• 275 words per page
• 12 pt Arial/Times New Roman
• Double line spacing
• Any citation style (APA, MLA, Chicago/Turabian, Harvard)

# Our guarantees

It's no longer good enough to create a high-quality product at a reasonable cost.
That is why we have created 9 compelling warranties to make your usage of our service pleasant, simple, and secure.

### Money-back guarantee

You must be completely confident in the quality of your products in order to provide a money-back guarantee. This is precisely how custom paper writing services work. We double-check that there are no hidden issues with this promise and that you are completely happy with the quality of your purchase.

### Zero-plagiarism guarantee

Our writers do not employ others’ writing tricks, because we are aware that plagiarism may cost a lot to our clients and take away their reputation.

### Free-revision policy

We want you to be satisfied with your order, so we offer a free revision policy. If you are not completely happy with your order, let us know and we will revise it for free.

### Privacy policy

We care about our customers and always strive to keep their trust. That’s why Customwritingspapers.com guarantees privacy and safety of your personal information. To ensure total security, we take the following measures:

### Professional Editors

Our team of editors works tirelessly to ensure that all papers meet our high standards for quality. They check for the instructions, grammar, punctuation, and spelling mistakes as well as for plagiarism.

### Fair-cooperation guarantee

We would never want to jeopardize our relationship with you, and that is why we offer a fair-cooperation guarantee: If for any reason you are not satisfied with your order, you can always get your money back.

### Professional Writers

We only hire the best, most qualified professionals to work on your order. Each writer is a degree holder with extensive experience in their field. You can be assured that your project will be handled by a true expert.

### Quality Control

Our quality assurance department ensures that each paper is of excellent quality before it is sent to you. You can be sure that your paper will meet all of the requirements that you set. Our experts are highly skilled and will follow your specific instructions to the letter.

### Customer support

We have a highly professional and qualified customer support team that is available 24/24, 365 days a year. They will be more than happy to answer any questions or concerns that you may have about our company or products. You can contact them by phone, email, or chat on our website.

## Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
\$26
The price is based on these factors:
Academic level
Number of pages
Urgency
customwritingspapers.com
Hello!
You Can Now Place your Order through WhatsApp

Order your essay today and save 30% with the discount code DISCOUNT2022