Exam 13: Leverage and Capital Structure

Deltona,USA is a development company that is currently financed with 100 per cent equity.There are 15 000 shares outstanding at a market price of $50 a share.Deltona has earnings before interest and taxes (EBIT)of $20 000.The firm has decided to issue $250 000 of debt at a rate of 8 per cent and use the proceeds to repurchase shares.Theresa owns 500 shares of Deltona and wants to use homemade leverage to offset the leverage used by Deltona.Theresa should:

Financial risk is defined as the:

T.L.C.Enterprises just revised its capital structure from a debt-equity ratio of 0.30 to a debt-equity ratio of 0.45.The firm's shareholders who prefer the old capital structure should:

The maximum firm value,according to the static theory of capital structure,occurs at a point where the:

Less Debt Inc.just revised its capital structure such that the firm's debt-equity ratio decreased from 0.80 to 0.40.Those individual investors who prefer the old capital structure:

Assume both corporate taxes and financial distress costs apply to a firm.Given this,the static theory of capital structure illustrates that:

A new board of directors of the BMP Corporation is considering a capital restructuring as currently BMP uses no-debt financing.The board is considering issuing $3 400 000 of debt and using the funds to retire one quarter of 160 000 shares that the company currently has outstanding.The interest rate on debt is 8.30% per annum.Calculate the break-even level of earnings before interest and taxes (EBIT)between both capital structure options:

Janus International is an all-equity company.You are given the following information for Janus International: EBIT = $880 000 forever Corporate tax rate = 25% Cost of equity = 12% The company is in the process of issuing $1 000 000 of bonds at par that carry a 11.50% annual coupon.What is the levered value of the firm?

Which one of the following best defines legal bankruptcy?