Exam 14: Capital Structure: Basic Concepts

Dakota Co.has expected earnings before interest and taxes of $8,100,an unlevered cost of capital of 10 percent,and debt with both a book and face value of $14,000.The debt has an 8 coupon.The tax rate is 34 percent.What is the value of the firm?

MM Proposition I with tax supports the theory that:

JL Lumber has a debt-equity ratio of .62.The firm's required return on assets is 12 percent and its current cost of equity is 15.60 percent.What is the firm's pretax cost of debt? Ignore taxes.

Sewing World had an all equity cost of capital of 12 percent.When the firm switched to being levered its cost of equity increased to 13.4 percent and its pretax cost of debt was 7.5 percent.What was the firm's debt-equity ratio after the switch? Ignore taxes.

Durbin,Inc. ,is an unlevered firm with a total market value of $365,000 with 20,000 shares of stock outstanding.The firm has expected EBIT of $24,000 if the economy is normal and $28,000 if the economy booms.The firm is considering a $73,000 bond issue with an attached interest rate of 5.5 percent.The bond proceeds will be used to repurchase shares.Ignore taxes.What will the earnings per share be after the repurchase if the economy booms?

MM Proposition I without taxes illustrates that:

MM Proposition II is the proposition that:

You have decided to retire and want to sell your shares in a closely held,all equity firm.The other shareholders have agreed to have the firm borrow $954,200 to purchase your 6,500 shares of stock at the current market value.The total number of shares outstanding is 30,000.What will be the new price per share after the repurchase?

A firm's capital structure refers to the:

Simpson's is an all equity firm that has 400,000 shares of stock outstanding.The company is in the process of borrowing $1.2 million at 8 percent interest to repurchase 50,000 shares of the firm's outstanding stock.What is the value of this firm if you ignore taxes?

Which of the following are given as reasons why individual investors may be able to borrow at the same rates as corporations? I.Corporate loans must be negotiated and supervised. II.Corporations often borrow using illiquid assets as collateral. III.Individuals tend to borrow smaller amounts. IV.Individuals can borrow on margin through a broker.

The Outlet has an unlevered cost of capital of 14.2 percent,a tax rate of 35 percent,and expected earnings before interest and taxes of $23,400.The company has $23,000 in bonds outstanding that have a coupon rate of 7 percent.The bonds are selling at par.What is the cost of equity?

A firm has a debt-to-equity ratio of .62.Its pretax cost of debt is 7.1 percent and its unlevered cost of capital is 13.8 percent.What is its levered cost of equity if there are no taxes or other imperfections?

A firm has a debt-to-equity ratio of .45 and a pretax cost of debt of 8 percent.The firm's WACC is 12.68 percent.What is the levered cost of equity if there are no taxes or other imperfections?

The fact that interest payments on debt are tax deductible is a key factor in which of these propositions?

Your firm has a $295,000 bond issue outstanding.These bonds have a 6.35 percent coupon,pay interest semiannually,and have a current market price equal to 101 percent of face value.What is the amount of the annual interest tax shield given a tax rate of 35 percent?

Explain the basic principle of MM Proposition I without taxes along with the assumptions upon which the proposition is based.

Presley Cleaners has an all-equity capital structure with an equity value of $64,100.The expected earnings are $8,900 based on estimated sales of $60,000.The firm pays no taxes.What is the cost of capital?

MM Proposition I with tax is based on the concept that the:

Ernie's has 3,500 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.5 percent.What is the amount of the annual interest tax shield if the tax rate is 34 percent?