Exam 15: Capital Structure Concepts

The greater the variability of costs, the greater the business risk of the firm. This is determined by the ____.

Explain how industry effects need to be considered in the capital structure decision.

Which of the following statements is true regarding the relationship between the firm's cost of debt and its capital structure (as measured by the debt ratio)?

Biotec has estimated the costs of debt and equity capital for various proportions of debt in its capital structure: \% of Debt Cost of Debt (\%) Cost of Equity (\%) 35 5.4 13.8 40 5.6 14.0 45 5.9 14.3 50 6.4 14.7 Based on these estimates, determine Biotec's optimal capital structure.

Seduak has estimated the costs of debt and equity capital for various proportions of debt in its capital structure: \% of Debt Cost of Debt (\%) Cost of Equity (\%) 0 - 13.0 10 5.4 13.3 20 5.4 13.8 30 5.8 14.4 40 6.3 15.2 50 7.0 16.0 60 8.2 17.0 Based on these estimates, determine Seduak's optimal capital structure.

What is optimal capital structure?

Triad Labs has total assets of $120 million and $40 million of debt in its capital structure. Its current cost of equity is 13%, and its cost of debt is 8.5%. Triad is considering increasing its debt to $70 million and purchasing its own stock with proceeds from the sale of $30 million in debt with a cost of 9.5%, reducing equity to $50 million. The cost of equity will increase to 14.5%. Net operating income (EBIT) will remain at $12 million. If Triad has a marginal tax rate of 40%, should the firm increase its debt? Assume that both debt and EBIT are perpetual.

The increased variability in earnings per share due to the firm's use of debt is a definition of ____.

Holding all other things equal, as the relative amount of debt in the capital structure of the firm increases, the cost of equity capital will ____.

Operating leverage involves the use of ____.

The tax deductibility of the interest payments on corporate debt is known as ____.

The airline industry is extremely price competitive, as well as having huge fixed costs and very low variable costs. This is an example of ____.

The optimal capital structure is determined by several factors, including all except which of the following?

The Modigliani-Miller theory that the value of the firm is independent of its capital structure is based on a(n) ____ process.

What is the market value of Barings, a firm with total assets of $100 million and $30 million in perpetual debt in its capital structure? Barings' cost of equity is 15%, and its cost of debt is 10%. Expected perpetual net operating income (EBIT) will be $17 million, and the marginal tax rate is 40%.

One of the primary assumptions of capital structure analysis is that the level and variability of ____ is not expected to change as changes in capital structure are contemplated.

With an optimal capital structure, ____.

In considering the arbitrage process in perfect capital markets with no income taxes, the market value of a firm is ____.

Which of the following is implied by perfect capital markets?

Studies of capital structure changes have found that actions that increase leverage have generally been associated with ____ stock returns and actions that decrease leverage are associated with ____ stock returns.