Suppose your chosen company requires AUD 10 Million to finance a new project and your finance...

Suppose your chosen company requires AUD 10 Million to finance a new project and your finance managers are evaluating whether to borrow or issue new shares.

a) Identify 2 key financial ratios that will be important to creditors.

Expert Solution

Two financial ratio which would be important to creditors while lending are as follows-

A. Times Interest Earned= (EBIT/ Total interest payment)- Times interest earned will be reflecting the ability of the company to repay its overall interest as it will be reflecting the overall earning of the company and it will be compared with the total interest payment of the company so the higher the ratio the better the chances of the company for getting the loan because the company will be having higher earning ability in order to fulfill the interest cost.

B. Debt Equity Ratio= it is the ratio of total debt to total equity and it will be reflecting that if there is a higher amount of debt to the total equity of the company then the company will be facing the solvency risk and it would not be liked by creditors, so they will be preferring that the company will be having a lower portion of the debt capital into the overall capital structure so there is a lower risk associated with lending capital to these companies and hence there would be a preference for lower debt capital in total capital structure by the creditors

jeff jeffy answered 2 years ago

Suppose your chosen company requires AUD 10 Million to finance a new project and your finance...

Suppose your chosen company requires AUD 10 Million to finance a new project and your finance managers are evaluating whether to borrow or issue new shares. b) Identify 2 key financial ratios that will be important to shareholders.

Your company plans to raise $100 million to finance its new two-year project by issuing new...

Your company plans to raise $100 million to finance its new two-year project by issuing new two-year bonds (with annual coupons and annual compounding). Your company and its new project are currently considered risk-free. Unfortunately, covenants in the preexisting debt issued during harder times impose restrictions on the amount of new debt. Specifically, if the face value of the new bond issue is below $100 million, your company can promise to pay an annual coupon of up to 5%. However,...

Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...

Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows of $2, $4 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true? a. The firm should reject the project, as the IRR is lower than the WACC. b. The firm should accept the project, as the IRR is higher than the WACC. c. The firm should accept the project, as the...

Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...

Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows of $2, $4 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true? The firm should reject the project, as the IRR is lower than the WACC. The firm should accept the project, as the IRR is higher than the WACC. The firm should accept the project, as the NPV is positive....

Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...

Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows of $2, $4 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true? The firm should reject the project, as the IRR is lower than the WACC. The firm should accept the project, as the IRR is higher than the WACC. The firm should accept the project, as the NPV is positive....

Question 1: You are currently evaluating a new project for your company. The project requires an...

Question 1: You are currently evaluating a new project for your company. The project requires an initial investment in equipment RM 90,000 and an investment in working capital of RM10,000 at the beginning (t=0). The project is expected to produce sales revenues of RM120, 000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The asset is depreciated over the project’s life using straight-line depreciation method. At the end of the project (t=3), you can sell...

A project to produce rocker seats requires a $10 million investment. If the project is financed...

A project to produce rocker seats requires a $10 million investment. If the project is financed on an all equity basis, the after tax cash flows are $8 million for 10 years. The cost of unlevered equity for such a solar heater project is 12%. The firm intends to raise $5 million in debt financing that will be repaid in equal installments in 10 years. The interest rate on the debt is 8%. Is the project worthwhile? Use APV method.Tax...

The finance manager of USQ Limited has a surplus of AUD 1 million and is interested...

The finance manager of USQ Limited has a surplus of AUD 1 million and is interested in using this money for triangular arbitrage. The Finance manager can either buy or sell at the quotes given below. Citibank 1 AUD = 0.76 USD Westpac 1 AUD = 1.05 NZD NAB 1 USD = 1.39 NZD Suppose we ignore all transaction costs. Show step by step how triangular arbitrage is possible using these quotes and show the...

Suppose your company needs $10 million to build a new assembly line. Your target debt-equity ratio...

Suppose your company needs $10 million to build a new assembly line. Your target debt-equity ratio is .4. The flotation cost for new equity is 10 percent and the flotation cost for debt is 7 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What is your company’s weighted average flotation cost, assuming all equity is raised externally? (Do not round intermediate calculations...

Acme is considering a new project that requires an investment of $100 million in machinery. This...

Acme is considering a new project that requires an investment of $100 million in machinery. This is expected to produce earnings before interest and taxes of $16 million per year for 4 years. The machinery will be fully depreciated to a zero-book value over 4 years using straight-line depreciation. Working capital costs are negligible. The tax rate is 25%. The unlevered cost of capital is 13%. They have a target debt ratio (debt/value) for the firm of 45%. Joker plans...

Question

Suppose your chosen company requires AUD 10 Million to finance a new project and your finance...

Solutions

Expert Solution

Related Solutions

Suppose your chosen company requires AUD 10 Million to finance a new project and your finance...

Your company plans to raise $100 million to finance its new two-year project by issuing new...

Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...

Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...

Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...

Question 1: You are currently evaluating a new project for your company. The project requires an...

A project to produce rocker seats requires a $10 million investment. If the project is financed...

The finance manager of USQ Limited has a surplus of AUD 1 million and is interested...

Suppose your company needs $10 million to build a new assembly line. Your target debt-equity ratio...

Acme is considering a new project that requires an investment of $100 million in machinery. This...