2:31 sulla Expert Q&A Done Case Article -- Finding DC's Optimal. Capital Structure Thirty-year-old Arthur Newman had recently been appointed managing director at Demi Colise (DC) a premium coffee producer in the small country of Genova As a thiye of Demi's Coffee, Newman was anxious to make his mark the company with which he had prown up. The business was operating well with full penetration of the Gemein Newman felt that the financial policies of the company we overly. Despite getierating strong and steady profitability of about $125 million per year or commery, Demi's Coffee's stock price had been flat for years, about 25 perhe His new office, Newman discovered, had unobstructed view of the mosty marble How wonderfully inelevant, he thought to himself as he turned to the financial malysis With borrowing costs running low, he felt confident that recapitaluring the balance shot would create sustained value for DC owners. His plan called for the debt, system 299 upto 75% of total assets, and using the proceeds to purchase company shares. The plan leave anet, ad operations of the business unchanged but allow the relatively low prevailing market rates on debt and increme dividenda per share. Committed song share price. Newman felt maybe it was time to sice up the company capitale differently, but they must see what is optimal first Genovia The Caribbean island nation of Genevi had a long tradition of political and still The country had been under the benevolent rule of a single family for generation. The national cconomy maintained few ties with neighboring countries, and trade was almost The population was stable, with approximately 12 million properes, c-chucated inhabitants. The country was known for its exceptional IT and regulation infrastructures citada access to business and economic information Economic policies in the countrypted Occasionally, the economy experienced short periods of conception and The country's population was known for its high ethical standarde Business promises and financial obligations were considered fully binding. To support the country's practice the povernment maintained no bankruptcy law where banka do motore any credit from prig the loans, and all contractual obligations were fully and completely enforced Tee economic development, the government did not to business income. Instead revenue was levied through personal income taxes. There was under contar the tax policy by introducing a 406 corporate income tax and tease introduce bankruptcy laws To maintain business investment incentives under the plan interest pyme would be to decoctible The Recapitalization Decision Newman's proposed recapitalization involved raising either $250SS00$750 iscal by issuing new dicht. The cost of debt is dependent on whether the country pusse bankrupte law. Without the bankruptcy law, the cost of he would be 4 regardless of det of deh they raise since there is no risk of default on the crediting bank. However, if they 2:32 Il Expert Q&A Done 1 tane me emra pem economy maintained few ties with neighboring countries and trade wassimo The population was able with approximately 12 million proper docated country was known for its exceptional IT and regulation infrastructure citati access to business and economic information Economic policies in the country Occasionally, the my experienced short periods of commission and The country's population was known for high ethical standard Business financial obligations were considered fully hung Top the country's practice the germent maintained no bunkruptcy low where bunks de selecredit riving the loans, and all contractual hlutions were fully and completely od Tema conomic development, the permet didnt tax business instead revenue was levied through personal income tax There was ander conside the tax policy by jstring parte income tax and reduce bylo To maintain bin investment incentives under the planet pebe deductible The Recapitalization Decision Newman's proposed recapitalization involved rising either $256 5500 5790 by inuing new debt. The cost of debt independent on whether the country passes the boty how. Without the bankruptcy law, the cost of dich would be regardless of the amount of che they mise since there is no risk of default on the crediting han. However, if the pe the bankruptcy law, higher amounts of debt will require higher of debe they 5250 million of debt, the cost of debt would be 45. they is 500 millo del secondo te would be, and if they ime 750 million of dehit the cost of debt would be 13% leche They will be using the cash to purchase compares the recapitalization the number of shares outstanding Newman was confident that she helders would be one of and expected that the share price would rise DC maintained a dividend policy of storing company profits to quity holders in the form of dividends. Although al dividend decline under the new plan, Newman anticipated that the reduction in the mer of wood for a net increase in the dividends peld per remaining share outstanding with a desire to the tone of his leadership DC, Newman wanted to implement the initiative itely. The accounting office hall provided a set of DC financial statements for the coming yeah) Based on a rudimentary knowledge of corporate finance, Newman mited the comment of spuity and WACC)for DC with the current no-debt policy at budsmarket of a risk free rate of and a company beta of 08. Newman appreciated slut become holders for the business risk, they deserved to tive a higher if the monte the bankruptcy laws. Nonetheles from a simple comparison of the cost of equally the of debt equity appeared to be an expensive source of funds To Newman, geht so equity looked like a superior financial policy became prve the company cheaper capital However, Newman's uncle, Edward, was highly skeptical of Neman's proposal Uncle and claimed that substituting debt for quity capital shifted more iness risk of the first holders, so the shacholders would require higher expected to Hesented that het of 0.8 must increase according to the famada Equation Hence, If the company w apprve in sourcing quality materials and the theme available cost. Shouldn't do the same for its capital? Exhibit Demi's Coffee 2:324 . Expert Q&A Done Demi's Coffee Pro Forma Financial Statement (in millions of dollars, except pershare figures) Income Stene 1.500 1.379 Reven Operating expenses Operating profit Net Income Dividende Share outstanding Dividends per she 135 225 Balance Sheet Current Fixed its Total . Book dicht Hook equity Total capital 1000 1.000 Cay Questions 1. Assuming that there are no corporate taxes and bankruptcy laws in the country How does the dividend per share change for each propied debt levellement DC is considering 25% 50% and 75% do 250M. SON SOM of debe). How does those levels company with their current station of de Calculate WACC for each proposed delt level. What is the optimal structure! Do you notice atrything special shout WACC each time the date level changes if so, what explains tut? Please plota praph of dois WACC on the yaxis Remember where in Can you comment on which capital structure would be bout Bashandeld me 2. Now, Anume that THERE ARE corporate tases of 40%, and bankruptcy laws been passed in the country, How does the dividend per share change for each proposed debt led under this cenario? Do you notice wything different here compared to the case when the were no corporale banes and no bankruptcy law? Calculate WACC for cache proposed debt level. What is the time capital structure? Is it different than the case when there was openes and bunkruptcy law? if it is different, then what explains that our of udet on the axis and WACC the yace and come which is structure would be her for shareholders Pleme 2:31 sulla Expert Q&A Done Case Article -- Finding DC's Optimal. Capital Structure Thirty-year-old Arthur Newman had recently been appointed managing director at Demi Colise (DC) a premium coffee producer in the small country of Genova As a thiye of Demi's Coffee, Newman was anxious to make his mark the company with which he had prown up. The business was operating well with full penetration of the Gemein Newman felt that the financial policies of the company we overly. Despite getierating strong and steady profitability of about $125 million per year or commery, Demi's Coffee's stock price had been flat for years, about 25 perhe His new office, Newman discovered, had unobstructed view of the mosty marble How wonderfully inelevant, he thought to himself as he turned to the financial malysis With borrowing costs running low, he felt confident that recapitaluring the balance shot would create sustained value for DC owners. His plan called for the debt, system 299 upto 75% of total assets, and using the proceeds to purchase company shares. The plan leave anet, ad operations of the business unchanged but allow the relatively low prevailing market rates on debt and increme dividenda per share. Committed song share price. Newman felt maybe it was time to sice up the company capitale differently, but they must see what is optimal first Genovia The Caribbean island nation of Genevi had a long tradition of political and still The country had been under the benevolent rule of a single family for generation. The national cconomy maintained few ties with neighboring countries, and trade was almost The population was stable, with approximately 12 million properes, c-chucated inhabitants. The country was known for its exceptional IT and regulation infrastructures citada access to business and economic information Economic policies in the countrypted Occasionally, the economy experienced short periods of conception and The country's population was known for its high ethical standarde Business promises and financial obligations were considered fully binding. To support the country's practice the povernment maintained no bankruptcy law where banka do motore any credit from prig the loans, and all contractual obligations were fully and completely enforced Tee economic development, the government did not to business income. Instead revenue was levied through personal income taxes. There was under contar the tax policy by introducing a 406 corporate income tax and tease introduce bankruptcy laws To maintain business investment incentives under the plan interest pyme would be to decoctible The Recapitalization Decision Newman's proposed recapitalization involved raising either $250SS00$750 iscal by issuing new dicht. The cost of debt is dependent on whether the country pusse bankrupte law. Without the bankruptcy law, the cost of he would be 4 regardless of det of deh they raise since there is no risk of default on the crediting bank. However, if they 2:32 Il Expert Q&A Done 1 tane me emra pem economy maintained few ties with neighboring countries and trade wassimo The population was able with approximately 12 million proper docated country was known for its exceptional IT and regulation infrastructure citati access to business and economic information Economic policies in the country Occasionally, the my experienced short periods of commission and The country's population was known for high ethical standard Business financial obligations were considered fully hung Top the country's practice the germent maintained no bunkruptcy low where bunks de selecredit riving the loans, and all contractual hlutions were fully and completely od Tema conomic development, the permet didnt tax business instead revenue was levied through personal income tax There was ander conside the tax policy by jstring parte income tax and reduce bylo To maintain bin investment incentives under the planet pebe deductible The Recapitalization Decision Newman's proposed recapitalization involved rising either $256 5500 5790 by inuing new debt. The cost of debt independent on whether the country passes the boty how. Without the bankruptcy law, the cost of dich would be regardless of the amount of che they mise since there is no risk of default on the crediting han. However, if the pe the bankruptcy law, higher amounts of debt will require higher of debe they 5250 million of debt, the cost of debt would be 45. they is 500 millo del secondo te would be, and if they ime 750 million of dehit the cost of debt would be 13% leche They will be using the cash to purchase compares the recapitalization the number of shares outstanding Newman was confident that she helders would be one of and expected that the share price would rise DC maintained a dividend policy of storing company profits to quity holders in the form of dividends. Although al dividend decline under the new plan, Newman anticipated that the reduction in the mer of wood for a net increase in the dividends peld per remaining share outstanding with a desire to the tone of his leadership DC, Newman wanted to implement the initiative itely. The accounting office hall provided a set of DC financial statements for the coming yeah) Based on a rudimentary knowledge of corporate finance, Newman mited the comment of spuity and WACC)for DC with the current no-debt policy at budsmarket of a risk free rate of and a company beta of 08. Newman appreciated slut become holders for the business risk, they deserved to tive a higher if the monte the bankruptcy laws. Nonetheles from a simple comparison of the cost of equally the of debt equity appeared to be an expensive source of funds To Newman, geht so equity looked like a superior financial policy became prve the company cheaper capital However, Newman's uncle, Edward, was highly skeptical of Neman's proposal Uncle and claimed that substituting debt for quity capital shifted more iness risk of the first holders, so the shacholders would require higher expected to Hesented that het of 0.8 must increase according to the famada Equation Hence, If the company w apprve in sourcing quality materials and the theme available cost. Shouldn't do the same for its capital? Exhibit Demi's Coffee 2:324 . Expert Q&A Done Demi's Coffee Pro Forma Financial Statement (in millions of dollars, except pershare figures) Income Stene 1.500 1.379 Reven Operating expenses Operating profit Net Income Dividende Share outstanding Dividends per she 135 225 Balance Sheet Current Fixed its Total . Book dicht Hook equity Total capital 1000 1.000 Cay Questions 1. Assuming that there are no corporate taxes and bankruptcy laws in the country How does the dividend per share change for each propied debt levellement DC is considering 25% 50% and 75% do 250M. SON SOM of debe). How does those levels company with their current station of de Calculate WACC for each proposed delt level. What is the optimal structure! Do you notice atrything special shout WACC each time the date level changes if so, what explains tut? Please plota praph of dois WACC on the yaxis Remember where in Can you comment on which capital structure would be bout Bashandeld me 2. Now, Anume that THERE ARE corporate tases of 40%, and bankruptcy laws been passed in the country, How does the dividend per share change for each proposed debt led under this cenario? Do you notice wything different here compared to the case when the were no corporale banes and no bankruptcy law? Calculate WACC for cache proposed debt level. What is the time capital structure? Is it different than the case when there was openes and bunkruptcy law? if it is different, then what explains that our of udet on the axis and WACC the yace and come which is structure would be her for shareholders Pleme