Exam 14: Capital Structure: Basic Concepts

The Studio is currently an all-equity firm that has 68,000 shares of stock outstanding with a market price of $36.80 a share.The current cost of equity is 11.7 percent,and the tax rate is 35 percent.The firm is considering adding $750,000 of debt with a coupon rate of 5.8 percent to its capital structure.The debt will be sold at par value.What is the levered value of the equity?

R₀ is defined as the

The Border Cafe has a cost of equity of 13.2 percent and a pretax cost of debt of 7.5 percent.The debt-equity ratio is 0.6 and the tax rate is 35 percent.What is the unlevered cost of capital?

An unlevered firm has a cost of capital of 12.46 percent and a tax rate of 35 percent.The firm is considering a new capital structure with 35 percent debt.The interest rate on the debt would be 6.68 percent.What would be the firm's levered cost of capital?

Assume you are reviewing a graph depicting earnings per share (EPS)on the vertical axis and earnings before interest (EBI)on the horizontal axis.Data points for both a levered and an unlevered firm are displayed.Given this,which statement accurately describes this graph?

If R₀ exceeds R_B then

Dakota Co.has expected earnings before interest and taxes of $37,800,an unlevered cost of capital of 12.2 percent,debt with a coupon rate of 5.6 percent,and both a book and face value of $24,000.The tax rate is 35 percent.What is the value of the firm?

An unlevered firm has expected earnings of $37,584 and a market value of equity of $324,000.The firm is planning to issue $65,000 of debt at 6.6 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?

MM Proposition I,without taxes,assumes that

The interest tax shield is a key reason why

An unlevered firm has a cost of capital of 13.8 percent and earnings before interest and taxes of $214,560.Assume the firm borrows $430,000 at an interest rate of 5.85 percent.The applicable tax rate is 35 percent.What is the value of the levered firm?

The Grist Mill has no debt,a total market value of $319,200,and 24,000 shares of stock outstanding.The firm has expected EBIT of $21,000 if the economy is normal and $24,000 if the economy booms.The firm is considering a bond issue of $79,800 with an attached interest rate of 5.9 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.What is the percentage increase in EPS if the economy booms rather than be normal?

A general rule for managers to follow is to establish a firm's capital structure such that the firm's

Ernie's has 4,200 bonds outstanding with a face value of $1,000 each,a market value of $1,060 each,and a coupon rate of 7.6 percent.What is the amount of the annual interest tax shield if the tax rate is 35 percent?

A firm has zero debt and an overall cost of capital of 11.7 percent.The firm is considering a new capital structure with 45 percent debt at an interest rate of 6.8 percent.Assume there are no taxes or other imperfections.What will be the levered cost of equity?

When selecting a capital structure,managers should aim to maximize the

Presley Cleaners has an all-equity capital structure with an equity value of $94,260.The expected earnings are $11,320 based on estimated sales of $60,000.The firm pays no taxes and can borrow at 6.4 percent.What is the value of R_WACC?

What does the present value of the tax shield from debt formula assume?

Which one of these proposes that the value of a levered firm exceeds the value of an unlevered firm by the present value of the tax shield?

Sewing World has an all-equity cost of capital of 11.72 percent,a levered cost of equity of 12.94 percent,and a pretax cost of debt of 6.8 percent.What is the firm's levered debt-equity ratio if you ignore taxes?