Exam 16: Capital Structure: Basic Concepts

Rosita's has a cost of equity of 13.76 percent and a pretax cost of debt of 8.5 percent.The debt-equity ratio is .60 and the tax rate is 21 percent.What is Rosita's unlevered cost of capital?

Salmon Inc.has debt with both a face and a market value of $227,000.This debt has a coupon rate of 7 percent and pays interest annually.The expected earnings before interest and taxes is $87,200,the tax rate is 21 percent,and the unlevered cost of capital is 12 percent.What is the firm's cost of equity?

If a firm is unlevered and has a cost of equity capital of 13.7 percent,what would be the cost of equity if its debt-equity ratio was revised to .4? The expected cost of debt is 7.4 percent and there are no taxes.

MM Proposition I with taxes is based on the concept that the:

Reena Industries has $138,000 of debt outstanding that is selling at par and has a coupon rate of 7 percent.If the tax rate is 21 percent,what is the present value of the tax shield on debt?

Jasmine's Boutique has 2,000 bonds outstanding with a face value of $1,000 each,a market value of $1,060 each,and a coupon rate of 9 percent.The interest is paid semiannually.What is the amount of the annual tax shield on debt if the tax rate is 23 percent?

Bryan invested in Bryco stock when the firm was financed solely with equity.The firm now has a debt-equity ratio of .3.To maintain the same level of leverage he originally had,Bryan needs to:

Assume an unlevered firm has total assets of $6,000,earnings before interest and taxes of $600,and 500 shares of stock outstanding.Further assume the firm decides to change 40 percent of its capital structure to debt with an interest rate of 8 percent.Ignore taxes.What will be the amount of the change in the earnings per share as a result of this change in the capital structure?

The effects of financial leverage depend on the operating earnings of the company.Based on this relationship,assume you graph the EPS and EBI for a firm,while ignoring taxes.Which one of these statements correctly states a relationship illustrated by the graph?

A firm should always select the capital structure which:

An all-equity firm has a cost of capital of 12.8 percent and a tax rate of 23 percent.At the firm's target debt-equity ratio,the pretax cost of debt is 7.35 percent and the cost of equity is 15.07 percent.What is the target debt-equity ratio?

The unlevered cost of capital is:

In the absence of taxes,the capital structure chosen by a firm doesn't really matter because of:

A firm has a debt-equity ratio of .48.Its cost of debt is 7 percent and its WACC is 10.8 percent.What is its cost of equity if there are no taxes or other imperfections?

According to MM Proposition II with no taxes,the:

Joe's Leisure Time Sports is an unlevered firm with an aftertax net income of $78,400.The unlevered cost of capital is 11.4 percent and the tax rate is 23 percent.What is the value of this firm?

The Spartan Co.has an unlevered cost of capital of 11.6 percent,a cost of debt of 7.9 percent,and a tax rate of 23 percent.What is the target debt-equity ratio if the targeted levered cost of equity is 12.6 percent?

MM Proposition II with taxes:

You own 25 percent of Unique Vacations,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 if you ignore taxes?

Thompson & Thomson is an all-equity firm that has 280,000 shares of stock outstanding.The company is in the process of borrowing $2.4 million at 5.5 percent interest to repurchase 75,000 shares of the outstanding stock.What is the value of this firm if you ignore taxes?