Tiger Company Limited's total assets are valued at $3,000,000 and currently 20% is financed by debt...

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Tiger Company Limited's total assets are valued at $3,000,000 and currently 20% is financed by debt while 80% is from equity. The company hired a financial consultant to determine the optimal debt to equity proportion. The consultant used the following information to carry out optimal capital structure. DebiTotal Assels (%) Equity (S) Debt ($) No. of Shares Interest (pa) Beta Other information Market Price of Share Dividend Payout Tax Rate Risk Free Average Market Rate 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70% 80% 3,000,000 2.700.000 2.400,000 2,100.000 1.800.000 1.500,000 1.200.000 900.000 600,000 300,000 600,000 900,000 1.200,000 1,500,000 1,800,000 2.100.000 2.400.000 100.000 90.000 80.000 70.000 60.000 50.000 40.000 30,000 20.000 6.0% 60% 70% 80% 9.0% 10.0% 12.0% 140% 1.70 1.80 1.90 2.00 2.20 1.50 1.60 2.30 . 0.0% 1.40 $30.00 100% 20% 4% 13% EBIT Projections EBIT(S) Probability $100,000 $400,000 $800.000 30% 45% 25% After analysing, the consultant provided the summary analysis. Debt: Total Expected SD of Coefficient of Est Beta Assets (6) EPS ($) Variance E 0% 10% 20% 30% 40% 50% 60% 70% 80% Required Expected Retn (%) Expected EPS $2.07 0.63 1.40 16.60% $2.30 0.65 1.50 17.50% $2.59 0.69 1.60 18.40% $2.96 0.75 1.70 19.30% $3.45 0.82 1.80 20.20% $4.14 0.94 1.90 21.10% 1.12 2.00 22.00% $6.90 1.64 2.20 23 80% 3.50 2.30 24.70% $3.28 $3.51 $3.74 $3.97 $4.19 $4.40 $460 $5.17 $4.21 $2.96 $10.35 Price of Equity ($) Price of WACC (%) Equity (times) 19.76 6.02 16.60% 20.06 5.71 16.15% 20.33 5.43 15.68% 20.55 5.18 15.19% 20.73 4.95 14.68% 20.85 4.74 14.15% 20.91 4.55 13.60% 17.70 4.20 13.86% 11.98 4.05 13.90% a) Based on the summary analysis provided by the consultants, prepare the management report (Note: Your recommendation should highlight the optimal capital structure for Tiger Company Limited). (5 Marks) b) With reference to capital structure, explain why organisations may not wish to operate at optimal level? (5 Marks) Tiger Company Limited's total assets are valued at $3,000,000 and currently 20% is financed by debt while 80% is from equity. The company hired a financial consultant to determine the optimal debt to equity proportion. The consultant used the following information to carry out optimal capital structure. DebiTotal Assels (%) Equity (S) Debt ($) No. of Shares Interest (pa) Beta Other information Market Price of Share Dividend Payout Tax Rate Risk Free Average Market Rate 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70% 80% 3,000,000 2.700.000 2.400,000 2,100.000 1.800.000 1.500,000 1.200.000 900.000 600,000 300,000 600,000 900,000 1.200,000 1,500,000 1,800,000 2.100.000 2.400.000 100.000 90.000 80.000 70.000 60.000 50.000 40.000 30,000 20.000 6.0% 60% 70% 80% 9.0% 10.0% 12.0% 140% 1.70 1.80 1.90 2.00 2.20 1.50 1.60 2.30 . 0.0% 1.40 $30.00 100% 20% 4% 13% EBIT Projections EBIT(S) Probability $100,000 $400,000 $800.000 30% 45% 25% After analysing, the consultant provided the summary analysis. Debt: Total Expected SD of Coefficient of Est Beta Assets (6) EPS ($) Variance E 0% 10% 20% 30% 40% 50% 60% 70% 80% Required Expected Retn (%) Expected EPS $2.07 0.63 1.40 16.60% $2.30 0.65 1.50 17.50% $2.59 0.69 1.60 18.40% $2.96 0.75 1.70 19.30% $3.45 0.82 1.80 20.20% $4.14 0.94 1.90 21.10% 1.12 2.00 22.00% $6.90 1.64 2.20 23 80% 3.50 2.30 24.70% $3.28 $3.51 $3.74 $3.97 $4.19 $4.40 $460 $5.17 $4.21 $2.96 $10.35 Price of Equity ($) Price of WACC (%) Equity (times) 19.76 6.02 16.60% 20.06 5.71 16.15% 20.33 5.43 15.68% 20.55 5.18 15.19% 20.73 4.95 14.68% 20.85 4.74 14.15% 20.91 4.55 13.60% 17.70 4.20 13.86% 11.98 4.05 13.90% a) Based on the summary analysis provided by the consultants, prepare the management report (Note: Your recommendation should highlight the optimal capital structure for Tiger Company Limited). (5 Marks) b) With reference to capital structure, explain why organisations may not wish to operate at optimal level? (5 Marks)

Answer rating: 100% (QA)

a Management Report Based on the summary analysis provided by the consultants we have evaluated different debttototal assets ratios and their impact on various financial metrics for Tiger Company Limi... View the full answer