Exam 16: Capital Structure

Consider two companies that are alike except in borrowing choices. Barry Corp. has no debt financing, and Crawford Corp. uses debt financing. The EBIT for both companies is $100. Barry Corp. has 40 shares outstanding and pays no interest. Crawford Corp. has 30 shares outstanding and pays $25 in interest. What is the EPS for each company?

The return to the investor is the ________.

George lends $200,000 for each new idea. George's history is that he selects low-risk projects or ideas that hit 80% of the time. What rate of return must each successful project pay George for him to break even?

Why is financial leverage attractive?

Modigliani and Miller followed up their initial work with a new model that incorporated a world with corporate taxes. Which of the statements below result from this model?

The work of Modigliani and Miller produced a near 100% debt/value mix for firms in a world of taxes. As it turns out, the theoretical and the actual debt/value ratio for most firms are almost identical at just about 100%.

Bankruptcy is the point at which the equity value of the firm is zero. That is, the value of the assets is equal to or less than the value of the liabilities of the firm.

In a perfect financial world, a company's value is dependent on its capital structure.

The decision on capital structure seems to be related to the expected earnings of the company: ________.

Fuji Inc. is registered as a business in the film-making industry. It can borrow in the debt market at 9%. Its cost of equity with 50% debt is 12%. Its corporate tax rate is 30%. If the M&M world of taxes holds, what is the WACC for Fuji with 50% debt financing?

Refer to the scenario above. What level of EBIT would make this an attractive strategy?

The Pecking Order Hypothesis suggests that as a last resort, firms will sell equity to fund investment opportunities.

A simple way of stating the original M&M proposition 1 is that it doesn't matter how you slice the pie--the size of the pie is still the same.

Moving from one source of funding to another in a particular order is called the ________.