1. You have been hired by Alpha Corporation, a mid-size company which manufactures car accessories to assess their capital structure. You have been provided with the most recent income statement and balance sheet for the company:

Income Statement ($ millions)
Revenues			100
Cost of Goods Sold (includes depreciation of $10 million)			60
EBIT			40
Interest Expenses			6
Taxable Income			34
Taxes			13.6
Net Income			20.4
Balance Sheet ($ millions)
Assets		Liabilities & Equity
Fixed Assets	100	Current Liabilities	20
Current Assets	40	Debt	60
		Equity	60
	140		140

 

 

 

The company had 10 million shares outstanding trading at $24 per share. Nearly 40% of the outstanding stock is held by the founding family. You are also provided with the following additional information:

 

·         A regression of returns on the stock against a market index over the last 5 years yields a beta of 0.90, but Alpha had no debt for the first four out of five years. Its debt ratio in the fifth year was similar to its current debt ratio.

 

·         The debt is 10-year bank debt; however, based on its interest coverage ratio the firm would be rated AA and carry a market interest rate of 10%.

 

·         The Treasury bill rate is 8% and the market risk premium is 5.5%.