Exam 14: Capital Structure: Basic Concepts

JL Lumber has a debt-equity ratio of 0.47.The firm's required return on assets is 11.8 percent and its current cost of equity is 14.23 percent.What is the firm's pretax cost of debt? Ignore taxes.

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?

MM Proposition I,without taxes,assumes that

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?

Sun Sports has an unlevered cost of capital of 14.3 percent,a cost of debt of 8.7 percent,and a tax rate of 35 percent.What is the target debt-equity ratio if the targeted levered cost of equity is 16.34 percent?

Shareholders value firms based on their

MM Proposition II,without taxes,is the proposition that

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

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?

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.

MM Proposition I,without taxes,supports the argument that

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?

LT Transport is an unlevered firm with a total market value of $672,000 and 50,000 shares of stock outstanding.The firm has expected EBIT of $64,500 if the economy is normal and $73,000 if the economy booms.The firm is considering a bond issue of $33,600 with an attached interest rate of 7.6 percent.The bond proceeds will be used to repurchase shares.The tax rate is 34 percent.What is the percentage increase in EPS if the economy booms rather than be normal?

The Border Crossing has no debt and a cost of capital of 12.2 percent.The shareholders would prefer to earn rate of return of 16.4 percent.What debt-equity ratio will be required to meet the shareholder's preference if the firm pays no taxes and can borrow at 6.2 percent?

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?

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?

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?

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?

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

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