Financial Corporation Case
Questions 1. If Symonds Electronics Inc. were to raise all of the required capital by issuing debt, what would the impact be on the firm’s shareholders? The impact on shareholders can be analyzed by calculating the EPS and ROE of the firm under the alternative scenarios as follows: All Debt With $5,000,000 Expansion Current Growth in Revenues Revenues EBIT Interest EBT EBT*(1-T) # of shares EPS Debt Equity Debt/Equity Ratio Return on Equity 15,000,000 2,250,000 0 2,250,000 1,350,000 1,000,000 1.35 0 15,000,000 0.00% 9.00% Worst Case 10% 16,500,000 2,475,000 500,000 1,975,000 1,185,000 1,000,000 1.185 5,000,000 15,000,000 33.33% 7.90% Expected Case 30% 19,500,000 2,925,000 500,000 2,425,000 1,455,000 1,000,000 1.455 5,000,000 15,000,000 33.33% 9.70% Best Case 50% 22,500,000 3,375,000 500,000 2,875,000 1,725,000 1,000,000 1.725 5,000,000 15,000,000 33.33% 11.50%
1. For sure, the company can do thing that they want to do, like investing in maintenance, machine, stocks, etc.
They also can leverage the investment to their assets. But by taking debt, the company increases the risk of investment. Debt providers are conservative. They cannot share any upside or profits. Therefore, they want management of resources). For addition, debt has little or no impact on control of the company. able to use homemade leverage to create the same payoffs as achieved by the firm. to eliminate all possible loss or downside risks. They need to be careful about the value of the debt; the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor
The calculations show that if Symonds Electronics Inc. were to raise all of the required capital by issuing debt, its EPS would vary between $1.19 and $1.73 per share with the expected EPS being about $0.11 higher than the current EPS of $1.35. Likewise, the firm’s ROE could vary between 7.9% and 11.5%, with the most likely ROE being 9.7%.
2. What does “homemade leverage” mean? Using
1. For sure, the company can do thing that they want to do, like investing in maintenance, machine, stocks, etc.
They also can leverage the investment to their assets. But by taking debt, the company increases the risk of investment. Debt providers are conservative. They cannot share any upside or profits. Therefore, they want management of resources). For addition, debt has little or no impact on control of the company. able to use homemade leverage to create the same payoffs as achieved by the firm. to eliminate all possible loss or downside risks. They need to be careful about the value of the debt; the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor
The calculations show that if Symonds Electronics Inc. were to raise all of the required capital by issuing debt, its EPS would vary between $1.19 and $1.73 per share with the expected EPS being about $0.11 higher than the current EPS of $1.35. Likewise, the firm’s ROE could vary between 7.9% and 11.5%, with the most likely ROE being 9.7%.
2. What does “homemade leverage” mean? Using