Exam 13: Leverage and Capital Structure

The Piano Movers can borrow at 7.8 percent.The firm currently has no debt, and the cost of equity is 15 percent.The current value of the firm is $680,000.What will the value be if the firm borrows $140,000 and uses the proceeds to repurchase shares? The corporate tax rate is 35 percent.

Granny's Home Remedy has a $27 million bond issue outstanding with a coupon rate of 8.75 percent and a current yield of 8.13 percent.What is the present value of the tax shield if the tax rate is 35 percent?

A firm is considering two different capital structures.The first option is an all-equity firm with 110,000 shares of stock.The second option is 75,000 shares of stock plus some debt.Ignoring taxes, the break-even level of earnings before interest and taxes between these two options is $136,000.How much money is the firm considering borrowing if the interest rate is 8 percent?

Regional Fleet Sales has a pretax cost of debt of 7.30 percent and a return on assets of 20.5 percent.The debt-equity ratio is .46.Ignore taxes.What is the cost of equity?

The static theory of capital structure assumes a firm:

Jasper Industrial has no debt outstanding and a total market value of $216,000.Earnings before interest and taxes, EBIT, are projected to be $15,000 if economic conditions are normal.If there is strong expansion in the economy, then EBIT will be 12 percent higher.If there is a recession, then EBIT will be 15 percent lower.There are currently 8,600 shares outstanding.Ignore taxes.What is the percentage change in EPS when a normal economy slips into recession?

Which one of the following terms applies to the costs incurred by a firm that is trying to avoid filing for bankruptcy?

You are comparing two possible capital structures for a firm.The first option is an all-equity firm.The second option involves the use of $3.8 million of debt.The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000.Given this, you know that leverage is beneficial to the firm:

Katz is an all-equity development company that has 52,000 shares of stock outstanding at a market price of $32 a share.The firm's earnings before interest and taxes are $46,000.Katz has decided to issue $176,000 of debt at a rate of 8 percent and use the proceeds to repurchase shares.What should Leslie do if she owns 500 shares of Katz stock and wants to use homemade leverage to offset the leverage being assumed by the firm?

Southern Foods has a $13 million bond issue outstanding with a coupon rate of 7.15 percent and a yield to maturity of 7.39 percent.What is the present value of the tax shield if the tax rate is 34 percent?

Crowded Fund Capital is an all-equity firm with a total market value of $1,015,000 and 20,000 shares of stock outstanding.Management is considering issuing $300,000 of debt at an interest rate of 5.5 percent and using the proceeds on a stock repurchase.As an all-equity firm, management believes its earnings before interest and taxes (EBIT) will be $266,000 if the economy is normal, $110,000 if it is in a recession, and $387,000 if the economy booms.Ignore taxes.What will the EPS be if the economy falls into a recession and the firm maintains its all-equity status?

Wookie's is an all-equity firm that has 250,000 shares of stock outstanding.Neal, the financial vice president, is considering borrowing $450,000 at 7 percent interest to repurchase 60,000 shares.Ignoring taxes, what is the current value of the firm?

Omnipotent, LLC is an all-equity firm with 75,000 shares of stock outstanding and a total market value of $984,000.Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $226,560 if the economy is normal, $64,000 if the economy is in a recession, and $356,000 if the economy booms.Ignore taxes.Management is considering issuing $165,000 of debt at a coupon rate of 7.5 percent.If the firm issues the debt, the proceeds will be used to repurchase stock.What will the earnings per share be if the debt is issued and the economy is in a recession? (Round the number of shares repurchased down to the nearest whole share.)

A firm has a cost of debt of 7.8 percent and a cost of equity of 15.6 percent.The debt-equity ratio is .52.There are no taxes.What is the firm's weighted average cost of capital?

Infinity Completion, Inc.currently has 50,000 shares of stock outstanding and no debt.The price per share is $23.75.The firm is considering borrowing funds at 6 percent interest and using the proceeds to repurchase 5,000 shares of stock.Ignore taxes.How much is the firm borrowing?

Which statement is true?

Which one of the following is correct based on the static theory of capital structure?

Which one of the following supports the theory that the value of a firm increases as the firm's level of debt increases?

The Fruit Mart is an all-equity firm with a current cost of equity of 17.4 percent.The estimated earnings before interest and taxes are $169,500 annually forever.Currently, the firm has no debt but is in the process of borrowing $400,000 at 9.5 percent interest.The tax rate is 35 percent.What is the value of the unlevered firm?

Stevenson's Bakery is an all-equity company that has projected perpetual earnings before interest and taxes of $43,700 a year.The cost of equity is 15.2 percent and the tax rate is 34 percent.The company can borrow money at 7.15 percent.If the company borrows $50,000, what will be its levered value?