B. A successful regional casual steak restaurant company is considering the acquisition of a regional barbeque...

  

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B. A successful regional casual steak restaurant company is considering the acquisition of a regional barbeque restaurant to diversify its market appeal. The barbeque restaurant has a cost structure that is heavier in fixed cost than the steak restaurant (more salaried and less hourly employees, more building and equipment purchased rather than rented, etc.). The forecasted ROES and degree of leverage figures below represent the impact of the change in the company's cost structure if this acquisition is executed. If the barbeque restaurant company is acquired, the company will choose between three financing options: • Financing the purchase by issuing a combination of new shares of stock and new bonds that will keep the company's debt ratio the same as it currently is at 67.5% • Financing the purchase by issuing new shares of stock for the entire acquisition • Financing the purchase by issuing new bonds for the entire acquisition Decision Options Company without Purchase Company with Purchase financed with Unchanged Capital Structure Company with Purchase financed with 100% Equity Company with Purchase financed with 100% Debt Debt Ratio 0.675 0.675 0.385 ROE ROE ROE Range of ROE Outcomes (3-5 years) 0.054 0.189 0.012 0.181 0.062 0.243 0.291 0.165 0.197 0.815 ROE (0.092) 0.178 0.384 Degree of Leverage DOL 2.71 X 3.48 X 3.48 X 3.48 X DFL 1.89 X 1.69 X 1.32 X 2.93 X DTL 5.12 X 5.88 X 4.59 X 10.20 X The NPVs and IRRs on this acquisition are quite strong and the steak restaurant is intending to move forward with the deal. They are aware that the acquisition and the choice of financing will impact both the operating leverage and the financial leverage of their firm. Use the range of ROES and the degree of leverage figures above to describe the 3. Impact of the steak restaurant's current leverage on the decision to purchase the barbeque restaurant B. A successful regional casual steak restaurant company is considering the acquisition of a regional barbeque restaurant to diversify its market appeal. The barbeque restaurant has a cost structure that is heavier in fixed cost than the steak restaurant (more salaried and less hourly employees, more building and equipment purchased rather than rented, etc.). The forecasted ROES and degree of leverage figures below represent the impact of the change in the company's cost structure if this acquisition is executed. If the barbeque restaurant company is acquired, the company will choose between three financing options: • Financing the purchase by issuing a combination of new shares of stock and new bonds that will keep the company's debt ratio the same as it currently is at 67.5% • Financing the purchase by issuing new shares of stock for the entire acquisition • Financing the purchase by issuing new bonds for the entire acquisition Decision Options Company without Purchase Company with Purchase financed with Unchanged Capital Structure Company with Purchase financed with 100% Equity Company with Purchase financed with 100% Debt Debt Ratio 0.675 0.675 0.385 ROE ROE ROE Range of ROE Outcomes (3-5 years) 0.054 0.189 0.012 0.181 0.062 0.243 0.291 0.165 0.197 0.815 ROE (0.092) 0.178 0.384 Degree of Leverage DOL 2.71 X 3.48 X 3.48 X 3.48 X DFL 1.89 X 1.69 X 1.32 X 2.93 X DTL 5.12 X 5.88 X 4.59 X 10.20 X The NPVs and IRRs on this acquisition are quite strong and the steak restaurant is intending to move forward with the deal. They are aware that the acquisition and the choice of financing will impact both the operating leverage and the financial leverage of their firm. Use the range of ROES and the degree of leverage figures above to describe the 3. Impact of the steak restaurant's current leverage on the decision to purchase the barbeque restaurant

Answer rating: 100% (QA)

With the purchasing and acquiring of Barbeque restaurant degree of financial leverage increases High... View the full answer