Exam 15: Capital Structure: Basic Concepts

The Nantucket Nugget is unlevered and is valued at €640,000.Nantucket is currently deciding whether including debt in its capital structure would increase its value.The current of cost of equity is 12%.Under consideration is issuing €300,000 in new debt with an 8% interest rate.Nantucket would repurchase €300,000 of equity with the proceeds of the debt issue.There are currently 32,000 shares outstanding and its effective marginal tax bracket is 34%.What will Nantucket's new WACC be?

Juanita's Steak House has €12,000 of debt outstanding that is selling at par and has a coupon rate of 8%.The tax rate is 34%.What is the present value of the tax shield?

Explain homemade leverage and why it matters.

The Winter Wear Company has expected earnings before interest and taxes of €2,100, an unlevered cost of capital of 14% and a tax rate of 34%.The company also has €2,800 of debt that carries a 7% coupon.The debt is selling at par Value.What is the value of this firm?

If a firm is unlevered and has a cost of equity capital 12%, what would its cost of equity be if its debt-equity ratio became 2? The expected cost of debt is 8%.

The financial manager for a new startup company is faced with a problem of how to finance this new firm.She has estimated EBIT of €200,000; €500,000; €900,000; and €1,500,000 for each of the four equally likely states of the economy.The firm needs €5,000,000 in funds to become operational.The question is whether €5,000,000 of new equity at €20 a share should be sold or a 50/50 debt/equity capital structure with 10% coupon rate debt is better. Calculate the EPS for each plan and economic state.What is the expected EPS for each plan? What should the firm do?

Hey Guys has debt with both a face and a market value of €3,000.This debt has a coupon rate of 7% and pays interest annually.The expected earnings before interest and taxes is €1,200, the tax rate is 34%, and the unlevered Cost of capital is 12%.What is the firm's cost of equity?

Financial leverage impacts the performance of the firm by:

When comparing levered vs.unlevered capital structures, leverage works to increase EPS for high levels of EBIT because:

The difference between a market value balance sheet and a book value balance sheet is that a market value balance sheet:

The Nantucket Nugget is unlevered and is valued at €640,000.Nantucket is currently deciding whether including debt in its capital structure would increase its value.The current cost of equity is 12%.Under consideration is issuing €300,000 in new debt with an 8% interest rate.Nantucket would repurchase €300,000 of equity with the proceeds of the debt issue.There are currently 32,000 shares outstanding and effective marginal tax bracket is zero.What will Nantucket's new WACC be?

The firm's capital structure refers to:

The effect of financial leverage depends on the operating earnings of the company.Which of the following is not true?

Uptown Interior Designs is an all equity firm that has 40,000 shares outstanding.The company has decided to borrow €1 million to buy out the shares of a deceased equityholder who holds 2,500 shares.What is the total value of this firm If you ignore taxes?

In an EPS-EBI graphical relationship, the debt ray and equity ray cross.At this point the equity and debt are:

The weighted average cost of capital is invariant to the use of leverage under MM conditions of no taxes.Graph the relationship of the weighted average cost of capital and leverage; be sure to include the cost of equity and debt. Explain why this relationship holds.

Your firm has a pre-tax cost of debt of 7% and an unlevered cost of capital of 13%.Your tax rate is 35% and your cost of equity is 15.26%.What is your debt-equity ratio?

The interest tax shield has no value for a firm when: I.the tax rate is equal to zero. II)the debt-equity ratio is exactly equal to 1. III)the firm is unlevered. IV)a firm elects 100% equity as its capital structure.

Thompson & Thomson is an all equity firm that has 500,000 shares outstanding.The company is in the process of borrowing €8 million at 9% interest to repurchase 200,000 shares of the outstanding equity.What is the value of this firm if you ignore taxes?

MM Proposition I with no tax supports the argument that: