Exam 16: Capital Structure: Basic Concepts

If a firm is unlevered and has a cost of equity capital 12% what would the cost of equity be if the firms became levered at 2:1?The expected cost of debt would be 8%.

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?

A firm has a debt-to-equity ratio of 1.Its cost of equity is 16%,and its cost of debt is 8%.If the corporate tax rate is .25,what would its cost of equity be if the debt-to-equity ratio were 0?

Financial leverage impacts the performance of the firm by:

A firm is all equity with 5,000 shares outstanding worth $7 each.They are planning on issuing $10,000 of new perpetual debt at the 8% market rate of interest.The effective tax rate is 25%.What is the change in equity value if they make the debt for equity exchange?

The Nantucket Nugget is unlevered and is valued at $640,000.Nantucket is currently deciding whether including debt in their capital structure would increase their 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 their effective marginal tax bracket is zero.What will Nantucket's new WACC be?

The JumpStart Corporation is unlevered and valued at $500,000.JumpStart has 200,000 shares outstanding.The company announces that in the near future it will issue $200,000 of debt and buy back $200,000 of stock.If the firm is in the 34% tax bracket,how many shares of stock will be repurchased?

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

In a world of no corporate taxes if the use of leverage does not change the value of the levered firm relative to the unlevered firm this is known as:

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?

Mike tells Steve that while his analysis looks good on paper,Steve will never be able to borrow at 8%,but would have to pay a more realistic rate of 12%.If Mike is right,what will Steve's payout be?

What is its 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 16%.Its current cost of debt is 12%.

The Nantucket Nugget is unlevered and is valued at $640,000.Nantucket is currently deciding whether including debt in their capital structure would increase their 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 their effective marginal tax bracket is 34%.What will Nantucket's new WACC be?

The Blue Mountain Company is an all equity firm worth $32 million and 5 million shares outstanding.A new capital structure is planned to replace $12 million of equity with debt.They believe it can be raised at 6% interest.If the tax rate is 30%,create the market value balance sheets: i)before any exchange is announced ii)at the time of announcement,and iii)at culmination of the exchange

Based on MM with taxes and without taxes,how much time should a financial manager spend analyzing the capital structure of his firm? What if the analysis is based on the static theory?

A key assumption of MMs Proposition I (no taxes)is:

Given a level of operating income of $2,500,show the specific strategy that Mike has in mind.

The Modigliani-Miller Proposition I without taxes states:

The unlevered cost of capital is:

MM Proposition I with no tax supports the argument that: