Exam 16: Capital Structure: Basic Concepts

Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding.The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock.What is the value of this firm if you ignore taxes?

According the MM with taxes, the value of the firm is maximized by taking on as much debt as possible.Show graphically how adding debt can increase value through the overall cost of capital.Explain how and under what conditions this impacts the cost of capital and translates into firm value.

A firm has a debt-to-equity ratio of .60.Its cost of debt is 8%.Its overall cost of capital is 12%.What is its cost of equity if there are no taxes or other imperfections?

The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called:

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

A firm has a debt-to-equity ratio of 1.Its cost of equity is 16%, and its cost of debt is 8%.If there are no taxes or other imperfections, what would be its cost of equity if the debt-to-equity ratio were 0?

The unlevered cost of capital is:

A firm has a debt-to-equity ratio of 1.75.If it had no debt, its cost of equity would be 9%.Its cost of debt is 7%.What is its cost of equity if the corporate tax rate is 50%?

Rosita's has a cost of equity of 13.8% 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?

The concept of homemade leverage is most associated with:

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 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 effective marginal tax bracket is zero.What will Nantucket's new WACC be?

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:

MM Proposition I with corporate taxes states that:

Uptown Interior Designs is an all equity firm that has 40,000 shares of stock outstanding.The company has decided to borrow $1 million to buy out the shares of a deceased stockholder who holds 2,500 shares.What is the total value of this firm if you ignore taxes?

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

A levered firm is a company that has:

MM Proposition I without taxes is used to illustrate:

The Modigliani-Miller Proposition I without taxes states:

Hey Guys!, Inc.has debt with both a face and a market value of $3,000.This debt has a coupon rate of 7% and pays interest annually.The expected earnings before interest and taxes is $1,200, the tax rate is 34%, and the unlevered cost of capital is 12%.What is the firm's cost of equity?

Walter's Distributors has a cost of equity of 13.84% and an unlevered cost of capital of 12%.The company has $5,000 in debt that is selling at par value.The levered value of the firm is $12,000 and the tax rate is 34%.What is the pre-tax cost of debt?