Analysis of Firm's Capital Structure and Its Impact on Firm Performance
Hello another of the same assignment from before, the professor only wants up to 500 pages. This is the question and the assignment.
The purpose of this assignment is to analyze a firm's capital structure and its impact on firm performance. Explain core concepts related to business risk, and recommend sound financial decisions based on analysis of a firm's capital structure and capital budgeting techniques.
Read the Chapter 15 Mini Case in Financial Management: Theory and Practice. Complete Parts 1 and 2.
Part 1: Using complete sentences and academic vocabulary, please answer questions A through c.
Part 2: Using the mini case information, write a 250-500-word recommendation of the financial decisions you propose for this company based on an analysis of its capital structure and capital budgeting techniques. Explain why you chose this recommendation and how it will impact the performance of the firm.
While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines, which can be found in the APA Style Guide, located in the Student Success Center.
This is the question From A through C.
Mini case 6: Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company’s EBIT was $120 million last year and is not expected to grow. PizzaPalace is in the 25% state-plus-federal tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6 percent. The firm is currently financed with all equity, and it has 10 million shares outstanding.
When you took your corporate finance course, your instructor stated that most firms’ owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. If the company were to recapitalize, then debt would be issued, and the funds received would be used to repurchase stock. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:
Percent Financed with Debt,
0%
—
20
8.0%
30
8.5
40
10.0
50
12.0
A) Using the free cash flow valuation model, show the only avenues by which capital structure can affect value.
(B)What is business risk? What factors influence a firm’s business risk?
(C)What is operating leverage, and how does it affect a firm’s business risk? Show the operating break-even point if a company has fixed costs of $200, a sales price of $15, and variable costs of $10.
Explain the difference between financial risk and business risk.
Benchmark Case – Mini Case
Your Name
Subject and Section
Professor’s Name
December 20, 2023
Part 1: Mini Case Analysis - Questions A to C
A. Capital Structure and Value:
One of the most commonly used valuation models in finance is the capital structure and value. Accordingly, under the Free Cash Flow (FCF) Valuation Model, factors such as financial distress costs and tax shield benefits could directly (and indirectly) affect the firm's value (Uzma et al., 2010). On the one hand, leveraging debt can help reduce a firm's tax liability (and increase its value), especially when interest payments are considered tax-deductible. On the other hand, increasing one's debt could increase the risk of financial distress and affect the company's valuation.
B. Business Risk:Business risk refers to the risk associated with the firm's operations. Market demand variability, product/service price stability, input cost fluctuations, and competition intensity influence it. High business risk means more uncertainty in EBIT (Earnings Before Interest and Taxes).
C. Operating Leverage and Business Risk:
a. Another standard measurement used in business and finance is operating leverage.
...