Exam 14: Capital Structure: Basic Concepts

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 14%.Its current cost of debt is 10%.

A firm has zero debt in its capital structure.Its overall cost of capital is 10%.The firm is considering a new capital structure with 60% debt.The interest rate on the debt would be 8%.Assuming there are no taxes or other imperfections,its cost of equity capital with the new capital structure would be:

A firm has debt of $5,000,equity of $16,000,a leveraged value of $8,900,a cost of debt of 8%,a cost of equity of 12%,and a tax rate of 34%.What is the firm's weighted average cost of capital?

The effect of financial leverage depends on the operating earnings of the company.Which of the following is not true?

The proposition that the cost of equity is a positive linear function of capital structure is called:

A firm has zero debt in its capital structure.Its overall cost of capital is 13%.The firm is considering a new capital structure with 55% debt.The interest rate on the debt would be 7%.Assuming there are no taxes or other imperfections,its cost of equity capital with the new capital structure would be:

A firm has 3,500 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.5%.The interest is paid semi-annually.What is the amount of the annual interest tax shield if the tax rate is 40%?

The Nantucket Nugget is unlevered and is valued at $640,000.Nantucket is currently deciding whether including debt in its capital structure would increase its value.The current of cost of equity is 12%.Under consideration is issuing $300,000 in new debt with an 8% interest rate.Nantucket would repurchase $300,000 of stock with the proceeds of the debt issue.There are currently 32,000 shares outstanding and its effective marginal tax bracket is 34%.What will Nantucket's new WACC be?

Your firm has a debt-equity ratio of .75.Your pre-tax cost of debt is 8.5% and your required return on assets is 15%.What is your cost of equity if you ignore taxes?

You own 25% of Unique Vactions,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 $1.5 million to purchase your 1,000 shares of stock.What is the total value of this firm today if you ignore taxes?

The increase in risk to equity holders when financial leverage is introduced is evidenced by:

A firm has a debt-to-equity ratio of .5.Its cost of equity is 22%,and its cost of debt is 16%.If the corporate tax rate is .40,what would its cost of equity be if the debt-to-equity ratio were 0?

Gail's Dance Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a market price of $42 a share.The current cost of equity is 12% and the tax rate is 34%.Gail is considering adding $1.25 million of debt with a coupon rate of 8% to her capital structure.The debt will be sold at par value.What is the levered value of the equity?

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

Rosita's has a cost of equity of 12.41% and a pre-tax cost of debt of 8.5%.The debt-equity ratio is .60 and the tax rate is .34.What is Rosita's unlevered cost of capital?

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:

The capital structure chosen by a firm doesn't really matter because of:

A firm has a debt-to-equity ratio of 1.30.If it had no debt,its cost of equity would be 15%.Its cost of debt is 10%.What is its cost of equity if there are no taxes or other imperfections?

The interest tax shield is a key reason why:

The difference between a market value balance sheet and a book value balance sheet is that a market value balance sheet: