Exam 14: Capital Structure: Basic Concepts

CCL is an unlevered firm with a total market value of $448,000 with 28,000 shares of stock outstanding.The firm has expected EBIT of $27,500 if the economy is normal and $32,000 if the economy booms.The firm is considering a bond issue of $80,000 with an attached interest rate of 6 percent.The bond proceeds will be used to repurchase shares.The tax rate is 34 percent.What will the earnings per share be after the repurchase if the economy is normal?

A firm should select the capital structure which:

The Border Crossing has no debt and a cost of capital of 11.2 percent.Assume the firm switches to a debt-to-equity ratio of .25 and issues bonds at par with a 6.3 percent coupon.What will be its cost of equity after the switch? Ignore taxes.

What does the present value of the tax shield from debt formula assume?

Houston Tools has expected earnings before interest and taxes of $236,800,an unlevered cost of capital of 12.65 percent,and a tax rate of 35 percent.The company has $420,000 of debt that carries a 7 percent coupon.The debt is selling at par value.What is the value of this firm?

MM Proposition I with no tax supports the argument that:

In an EPS-EBI graphical relationship,why does the debt line have a lower vertical intercept point than the no debt line?

Marley's is an unlevered firm with a total market value of $190,000 with 5,000 shares of stock outstanding.The firm has expected EBIT of $7,500 if the economy is normal and $9,000 if the economy booms.The firm is considering a $76,000 bond issue with an attached interest rate of 4.5 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.What will be the earnings per share after the repurchase if the economy booms?

A firm has debt of $23,200,equity of $43,500,an aftertax cost of debt of 7.14 percent,a cost of equity of 12.8 percent,and a tax rate of 35 percent.What is the firm's weighted average cost of capital?

MM Proposition II with tax:

Which of these will appear on a market value balance sheet? I.Original cost of fixed assets less any depreciation to date II.Issue value of bonds III.Current sales value of a firm's plant and equipment IV.Current market value of the outstanding shares of stock

Which one of these statements is correct?

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

Financial leverage impacts the performance of a firm by:

DL Trucking has a cost of equity of 14.4 percent and an unlevered cost of capital of 13 percent.The company has $20,000 in debt that is selling at par value.The levered value of the firm is $46,000 and the tax rate is 35 percent.What is the pretax cost of debt?

Leverage becomes a disadvantage to a firm as soon as the firm's earnings before interest:

Which one of these represents the difference between the value of a levered and an unlevered firm?

Which one of these argues than the value of a firm is independent of its capital structure?

Baker Breads has $13,000 of debt outstanding that is selling at par and has a coupon rate of 7 percent.The tax rate is 35 percent.What is the present value of the tax shield?

BL Plastics is an all equity firm that has 27,000 shares of stock outstanding.The company has decided to borrow $46,080 to buy out the shares of a deceased stockholder who holds 600 shares.What is the total value of this firm if you ignore taxes?