Exam 13: Capital Structure Concepts

What is the present value of the tax shield to a firm that has a capital structure consisting of $100 million of perpetual debt and $180 million of equity, if the average interest rate on debt is 9%, the return on equity is 13%, and the marginal tax rate is 40%?

The mix of debt, preferred stock, and common equity that minimizes the weighted cost of capital to the firm is known as the

Modigliani and Miller show that the value of a firm is capital structure given perfect capital markets and no corporate income taxes.

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 objective of capital structure management is to find the capital mix that leads to

With financial leverage, a change in EBIT results in a change in:

The managerial implications of capital structure theory include all of the following except:

In considering a firm's capital structure, the firm should increase its which will maximize its value.

The market value of a levered firm can be represented by the following equation: Market value of levered firm = Market value of unlevered firm Present value of tax shield Present value of financial distress costs Present value of agency costs

Calculate the market value of a firm with total assets of $105 million and $50 million of 10% perpetual debt in the capital structure.The firm's cost of equity is 14% on the $55 million in equity in the capital structure.The perpetual EBIT is expected to be $9 million and the marginal tax rate is 40%.

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.

What is the present value of the tax shield to a firm that has total assets of $80 million and a net worth of $55 million, if the average interest rate on perpetual debt is 8.5%, the average return on equity is 14%, and the marginal tax rate is 35%?

Agency costs

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

The amount of permanent short-term debt, long-term debt, preferred stock, and common stock used to finance a firm defines the firm's

The use of fixed-cost financing sources is referred to as the use of

The use of fixed cost sources of funds, such as debt and preferred stock affect a firm's .

Protection for debt holders takes the form of protective covenants in the bond indenture.These covenants place restrictions on which of the following activities?

What is optimal capital structure?

Perfect capital markets imply the following: