Exam 16: Capital Structure: Basic Concepts

CT Stores has debt with a book value of $325,000 and a market value of $319,000.The firm's equity has a book value of $526,000 and a market value of $684,000.The tax rate is 21 percent and the cost of capital is 11.2 percent.What is the market value of this firm based on MM Proposition I without taxes?

Your firm has a bond issue with a face value of $250,000 outstanding.These bonds have a coupon rate of 7 percent,pay interest semiannually,and have a current market price equal to 103 percent of face value.What is the amount of the annual tax shield on debt given a tax rate of 21 percent?

A firm has an equity multiplier of 1.57,an unlevered cost of equity of 14 percent,a levered cost of equity of 15.6 percent,and a tax rate of 21 percent.What is the cost of debt?

MM Proposition I without taxes proposes that:

MM Proposition II with no taxes supports the argument that a firm's:

Assume an initial scenario where a levered firm has total assets of $8,000,earnings before interest and taxes of $600,400 shares of stock outstanding,a debt-equity ratio of .25,and a cost of debt of 7 percent.Now assume a second scenario where the firm changes to an all-equity structure by issuing new shares to pay off debt while a shareholder holding 10 percent of the stock borrows funds at 7 percent and uses homemade leverage to offset the firm's change in capital structure.Ignore taxes.What are the net earnings for this shareholder under the initial scenario? Under the second scenario?

The firm's capital structure refers to the:

The tax savings of the firm derived from the deductibility of interest expense is called the:

A firm has a debt-equity ratio of .55 with a cost of debt of 6.7 percent.If it had no debt,its cost of equity would be 14.5 percent.What is its levered cost of equity assuming there are no taxes or other imperfections?

The proposition that the value of a levered firm is equal to the value of an unlevered firm is known as:

Anderson's Furniture Outlet has an unlevered cost of capital of 10.3 percent,a tax rate of 21 percent,and expected earnings before interest and taxes of $1,900.The company has $4,000 in bonds outstanding that have an annual coupon of 7 percent.If the bonds are selling at par,what is the cost of equity?

The Winter Wear Company has expected earnings before interest and taxes of $3,800,an unlevered cost of capital of 15.4 percent and a tax rate of 22 percent.The company also has $2,600 of debt with a coupon rate of 5.7 percent.The debt is selling at par value.What is the value of this firm?

A firm has a debt-equity ratio of .64,a pretax cost of debt of 8.5 percent,and a required return on assets of 12.6 percent.What is the cost of equity if you ignore taxes?

A firm has a debt-equity ratio of .64,a cost of equity of 13.04 percent,and a cost of debt of 8 percent.Assume the corporate tax rate is 25 percent.What would be the cost of equity if the firm were all-equity financed?