Exam 17: Capital Structure: Limits to the Use of Debt

Wigdor Manufacturing is currently all equity financed,has an EBIT of $2 million,and is in the 34% tax bracket. Louis,the company's founder,is the lone shareholder. Assume that all earnings are paid out as dividends. Now consider the fact that Louis must pay personal tax on the firm's cash flow. Louis pays taxes on interest at a rate of 33%,but pays taxes on dividends at a rate of 28%. Calculate the total cash flow to Louis after he pays personal taxes.

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 50%

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 30% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0%

The All-Mine Corporation is deciding whether to invest in a new project. The project would have to be financed by equity,the cost is $2,000 and will return $2,500 or 25% in one year. The discount rate for both bonds and stock is 15% and the tax rate is zero. The predicted cash flows are $4,500 in a good economy,$3,000 in an average economy and $1,000 in a poor economy. Each economic outcome is equally likely and the promised debt repayment is $3,000. Should the company take the project? What is the value of firm and its components before and after the project addition?

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 40% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 30%

Suppose a Miller equilibrium exists with a corporate tax rate of 30% and a personal tax rate on income from bonds of 35%. What is the personal tax rate on income from stocks?

Your firm has a debt-equity ratio of .60. Your cost of equity is 11% and your after-tax cost of debt is 7%. What will your cost of equity be if the target capital structure becomes a 50/50 mix of debt and equity?

The explicit and implicit costs associated with corporate default are referred to as the _____ costs of a firm.

The Aggie Company has EBIT of $70,000 and market value debt of $100,000 outstanding with a 9% coupon rate. The cost of equity for an all equity firm would be 14%. Aggie has a 35% corporate tax rate. Investors face a 20% tax rate on debt receipts and a 15% rate on equity. Determine the value of Aggie.

One of the indirect costs to bankruptcy is the incentive toward underinvestment. Following this strategy may result in:

An investment is available that pays a tax-free 8%. The corporate tax rate is 35%. Ignoring risk,what is the pre-tax return on taxable bonds?

The Aggie Company has EBIT of $50,000 and market value debt of $100,000 outstanding with a 9% coupon rate. The cost of equity for an all equity firm would be 14%. Aggie has a 35% corporate tax rate. Investors face a 20% tax rate on debt receipts and a 15% rate on equity. Determine the value of Aggie.

The optimal capital structure has been achieved when the:

Conflicts of interest between stockholders and bondholders are known as: