BOLASIS is a retail company that manages a chain of supermarkets, operating solely in the US market. The company has issued common stock equity and bonds to finance its operations. Those are its only sources of capital. The company’s shares are publicly traded in the New York Stock Exchange (NYSE). Answer the following questions treating sections (a), (b), and (c) as independent to each other.

(a) A financial analyst is undertaking a comparative analysis between BOLASIS and VISTR, another public US company that manages supermarkets. He has identified the following differences between the two companies:

• VISTR, being a younger company, is smaller than BOLASIS both in terms of total assets and market value.

• VISTR operates only a few brick and mortar stores, as it mostly does home delivery for its products. As a result, its ratio of fixed to total assets is much lower than that of BOLASIS.

• The stock of VISTR trades at a much higher trailing price-to-earnings ratio than that of the stock of BOLASIS. This is because VISTR is following a very aggressive marketing strategy and therefore investors expect its revenues and earnings to grow rapidly in the future. BOLASIS, being an established company with loyal customers, is expected to maintain its moderate but steady growth rate.

Discuss which of the two companies is expected to have a higher leverage ratio based on the three aforementioned differences, relating you discussion to the trade-off theory of capital structure.

(b) BOLASIS announced its intention to issue new shares via a seasoned equity offering (SEO). Upon the announcement, the market price of its stock dropped by 3%. Discuss the potential reasons for this drop in the context of the pecking order theory of capital structure.

(c) After the onset of the pandemic and its fallout on the economy, several changes occurred in the US economy and financial markets. Discuss the potential impact of each one of the following changes on the weighted average cost of capital (WACC) of BOLASIS. When discussing the impact of each one of these changes, assume that everything else remains constant.

i. The US Federal Reserve Bank lowered the reference interest rate.

ii. The annual expected return for the S&P 500, the benchmark index for the US stock market, was revised downwards.

Answer rating: 100% (QA)

Answer Leverage is the method that implies the of dept ... View the full answer