Exam 16: Capital Structure: Basic Concepts

Your firm has a pre-tax cost of debt of 7% and an unlevered cost of capital of 13%.Your tax rate is 35% and your cost of equity is 15.26%.What is your debt-equity ratio?

The Winter Wear Company has expected earnings before interest and taxes of $2,100, an unlevered cost of capital of 14% and a tax rate of 34%.The company also has $2,800 of debt that carries a 7% coupon.The debt is selling at par value.What is the value of this firm?

A firm has a debt-to-equity ratio of 1.20.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?

A firm has zero debt in its capital structure.Its overall cost of capital is 9%.The firm is considering a new capital structure with 40% debt.The interest rate on the debt would be 4%.Assuming that the corporate tax rate is 34%, what would its cost of equity capital with the new capital structure be?

Explain homemade leverage and why it matters.

The cost of capital for a firm, rWACC, in a zero tax environment is:

In an EPS-EBI graphical relationship, the debt ray and equity ray cross.At this point the equity and debt are:

Anderson's Furniture Outlet has an unlevered cost of capital of 10%, a tax rate of 34%, and expected earnings before interest and taxes of $1,600.The company has $3,000 in bonds outstanding that have an 8% coupon and pay interest annually.The bonds are selling at par value.What is the cost of equity?

The reason that MM Proposition I does not hold in the presence of corporate taxation is because:

When comparing levered vs.unlevered capital structures, leverage works to increase EPS for high levels of EBIT because:

Financial leverage impacts the performance of the firm by:

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

Batter's Home has 3,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8%.The interest is paid semi-annually.What is the amount of the annual interest tax shield if the tax rate is 30%?

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?

The Backwoods Lumber Co.has a debt-equity ratio of .80.The firm's required return on assets is 12% and its cost of equity is 15.68%.What is the pre-tax cost of debt based on MM Proposition II with no taxes?

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

The Spartan Co.has an unlevered cost of capital of 11%, a cost of debt of 8%, and a tax rate of 35%.What is the target debt-equity ratio if the targeted cost of equity is 12%?

A firm should select the capital structure which:

The interest tax shield has no value for a firm when: I.the tax rate is equal to zero. II.the debt-equity ratio is exactly equal to 1. III.the firm is unlevered. IV.a firm elects 100% equity as its capital structure.

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 _____.