Exam 14: Capital Structure: Basic Concepts

Bryan invested in Bryco stock when the firm was financed solely with equity.The firm is now utilizing debt in its capital structure.To unlever his position,Bryan needs to

The Pizza Shoppe has debt with both a face and market value of $24,000 and a coupon rate of 6.4 percent.The expected earnings before interest and taxes are $21,400,the tax rate is 35 percent,and the unlevered cost of capital is 11.4 percent.What is the firm's cost of equity?

A firm has a debt-equity ratio of 0.45,an unlevered WACC of 12.68 percent,and a pretax cost of debt of 6.8 percent.What is the levered cost of equity if there are no taxes or other imperfections?

Given a world without taxes,R_WACC of an unlevered firm will equal

Baker Breads has $428,000 of debt outstanding that is selling at par and has a coupon rate of 6.25 percent.The tax rate is 34 percent.What is the present value of the tax shield?

In the absence of taxes,MM argues that

Marley's is an unlevered firm with a total market value of $220,000 and 5,000 shares of stock outstanding.The firm has expected EBIT of $10,000 if the economy is normal and $12,000 if the economy booms.The firm is considering a bond issue of $88,000 with an attached interest rate of 5.9 percent.The bond proceeds will be used to repurchase shares.Ignore taxes.What will be the earnings per share after the repurchase if the economy booms?

Durbin,Inc.,is an unlevered firm with a total market value of $460,000 and 40,000 shares of stock outstanding.The firm has expected EBIT of $48,000 if the economy is normal and $56,000 if the economy booms.The firm is considering a bond issue of $57,500 with an attached interest rate of 6.8 percent.The bond proceeds will be used to repurchase shares.Ignore taxes.What will be the earnings per share after the repurchase if the economy booms?

Which of the following are given as reasons why individual investors may be able to borrow at the same rates as corporations? I.Corporate loans must be negotiated and supervised. II)Corporations often borrow using illiquid assets as collateral. III)Individuals tend to borrow smaller amounts. IV)Individuals can borrow on margin through a broker.

An unlevered firm is a company that

Which one of these events might cause the biggest challenge to the MM propositions?

Ignoring taxes,financial leverage affects the performance of a firm by

Alto and Tenor have 17,400 shares of stock outstanding at a market price of $27 per share.The firm also has $140,000 of 6.2 percent bonds outstanding that are selling at par.The firm does not expect to pay taxes for the foreseeable future.The cost of equity is 15.3 percent.What is the value of R_WACC?

Shareholders value firms based on their

Travel Express has a debt-equity ratio of 0.42.The pretax cost of debt is 7.1 percent while the unlevered cost of capital is 13.6 percent.What is the cost of equity if the tax rate is 34 percent?

Models and More has a bond issue outstanding with a face value of $215,000.These bonds have a coupon rate of 5.65 percent,pay interest semiannually,and have a current market price quote of 1.01.The tax rate is 34 percent.What is the amount of the annual interest tax shield?

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

Leisure Vacations is an unlevered firm with aftertax net income of $57,980,a cost of capital of 13.2 percent,and a tax rate of 35 percent.What is the value of this firm?

Which one of these statements is correct?

A firm's capital structure refers to the