Exam 14: Capital Structure: Basic Concepts

DL Trucking has a cost of equity of 15.4 percent and an unlevered cost of capital of 13.2 percent.The company has $24,000 in debt that is selling at par value.The levered value of the firm is $59,000 and the tax rate is 34 percent.What is the pretax cost of debt?

Hazlett's is an unlevered firm with a total market value of $280,000 and 10,000 shares of stock outstanding.The firm has expected EBIT of $16,000 if the economy is normal and $19,000 if the economy booms.The firm is considering a bond issue of $42,000 with an attached interest rate of 7.3 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.What will be the earnings per share after the repurchase if the economy is normal?

Andrea's Markets has debt of $318,200,equity of $493,500,an aftertax cost of debt of 6.80 percent,a cost of equity of 13.39 percent,and a tax rate of 34 percent.What is the firm's weighted average cost of capital?

Which one of these argues than the value of a firm is independent of its capital structure?

When comparing levered versus unlevered capital structures,leverage works to increase EPS for high levels of EBIT because interest payments on the debt

The MM propositions would suggest that firms should prefer which one of these debt-to-equity ratios?

The formula associated with MM Proposition II,without taxes,is

An all-equity firm has a cost of capital of 13.3 percent.The firm is considering switching to a debt-equity ratio of 0.35 with a pretax cost of debt of 7.5 percent.The tax rate is 35 percent.What will be the firm's levered cost of equity?

MM Proposition I,with taxes,is based on the concept that the

Delta Mills and Franklin Mill are identical firms except for their capital structures.Delta is an unlevered firm with $680,000 of equity.Franklin is a levered firm with $425,000 of equity and $255,000 of debt at an interest rate of 6.2 percent.Both Delta and Franklin have an expected EBIT of $84,000.Ignore taxes.Delta has a WACC of ________ percent and Franklin's WACC is ________ percent.

MM Proposition II,without taxes,implies that the required return on equity is

Houston Tools has expected earnings before interest and taxes of $189,400,an unlevered cost of capital of 12.87 percent,and a tax rate of 34 percent.The company has $318,000 of debt that carries a coupon rate of 6.2 percent.The debt is selling at par value.What is the value of this firm?

MM Proposition II,with taxes

MM Proposition I,with tax,supports the theory that

Which one of these symbols is correctly matched with its definition?

MM Proposition I,without taxes,supports the argument that

The fact that interest payments on debt are tax deductible is a key factor in which of these propositions?

An all-equity firm has expected earnings of $14,200 and a market value of $82,271.The firm is planning to issue $15,000 of debt at 6.3 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?

Ignoring taxes,leverage becomes a disadvantage to a firm as soon as the firm's earnings before interest

Consider the pie models of corporate structure.What is the difference between the all-equity pie and the levered pie for a firm in the presence of taxes?