Exam 16: Capital Structure: Basic Concepts

Lyme Home has 3,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8%. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 30%?

Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?

Reena Industries has $10,000 of debt outstanding that is selling at par and has a coupon rate of 7%. The tax rate is 34%. What is the present value of the tax shield?

A firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%. What is its cost of equity if there are no taxes or other imperfections?

Bryan invested in Bryco,Inc. 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:

Aspen's Distributors has a cost of equity of 13.84% and an unlevered cost of capital of 12%. The company has $5,000 in debt that is selling at par value. The levered value of the firm is $12,000 and the tax rate is 34%. What is the pre-tax cost of debt?

Bigelow,Inc. has a cost of equity of 13.56% and a pre-tax cost of debt of 7%. The required return on the assets is 11%. What is the firm's debt-equity ratio based on MM Proposition II with no taxes?

You own 30% of Westcoast,Inc. You have decided to retire and want to sell your shares in this closely held,all equity firm. The other shareholders have agreed to have the firm borrow $2 million to purchase your 2,000 shares of stock. What is the total value of this firm today if you ignore taxes?

A firm has debt of $7,000,equity of $12,000,a leveraged value of $8,900,a cost of debt of 7%,a cost of equity of 14%,and a tax rate of 30%. What is the firm's weighted average cost of capital?

Consider two firms,U and L,both with $50,000 in assets. Firm U is unlevered,and firm L has $20,000 of debt that pays 8% interest. Firm U has 1,000 shares outstanding,while firm L has 600 shares outstanding. Mike owns 20% of firm L and believes that leverage works in his favor. Steve tells Mike that this is an illusion,and that with the possibility of borrowing on his own account at 8% interest,he can replicate Mike's payout from firm L. Given a level of operating income of $2,500,show the specific strategy that Mike has in mind.

The concept of homemade leverage is most associated with:

MM Proposition I with no tax supports the argument that:

The change in firm value in the presence of corporate taxes only is:

What is the cost of equity for a firm if the corporate tax rate is 40%? The firm has a debt-to-equity ratio of 1.5. If it had no debt,its cost of equity would be 16%. Its current cost of debt is 10%.

A firm has zero debt in its capital structure. Its overall cost of capital is 9%. The firm is considering a new capital structure with 40% debt. The interest rate on the debt would be 4%. Assuming that the corporate tax rate is 34%,what would the cost of equity capital with the new capital structure be?

A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%,and its cost of debt is 8%. If the corporate tax rate is 25%,what would the cost of equity be if the debt-to-equity ratio were 0?

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

A firm has a debt-to-equity ratio of 1.75. If it had no debt,its cost of equity would be 14%. Its cost of debt is 10%. What is its cost of equity if the corporate tax rate is 50%?

Juanita's Steak House has $12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?

Your firm has a debt-equity ratio of .60. Your pre-tax cost of debt is 6.0% and your required return on assets is 12%. What is your cost of equity if you ignore taxes?