Ron Inc., who has an applicable 30% corporate tax as stated on its BIR tax registration form, is trying to determine its optimal capital structure. The company's capital structure consists of bonds and common stock. The following are the Capital Structure options: Capital Structure Debt to Equity Before-tax Equity Ratio options Ratio cost of debt Cs1 60% 67% 7.50% CS2 50% 100% 8.50% CS3 45% 122% 9.00% The company uses the CAPM to estimate its cost of ordinary or common equity. Ron Inc. estimates that its beta would be 1.0 if it has no debt. The risk-free rate is 3% and the market rate of return on average stock market is 8%.
Ron Inc., who has an applicable 30% corporate tax as stated on its BIR tax registration form, is trying to determine its optimal capital structure. The company's capital structure consists of bonds and common stock. The following are the Capital Structure options: Capital Structure Debt to Equity Before-tax Equity Ratio options Ratio cost of debt Cs1 60% 67% 7.50% CS2 50% 100% 8.50% CS3 45% 122% 9.00% The company uses the CAPM to estimate its cost of ordinary or common equity. Ron Inc. estimates that its beta would be 1.0 if it has no debt. The risk-free rate is 3% and the market rate of return on average stock market is 8%.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
1. What is the debt ratio for CS1?
2. What is the debt ratio for CS2?
3. The levered beta for CS2 is
4. The levered beta for CS3 is
5. What is the
Transcribed Image Text:Ron Inc., who has an applicable 30% corporate tax as stated on its BIR tax registration form, is trying to determine its
optimal capital structure. The company's capital structure consists of bonds and common stock. The following are the
Capital Structure options:
Capital Structure
options
Debt to Equity
Before-tax
Equity Ratio
Ratio
cost of debt
Cs1
60%
67%
7.50%
CS2
50%
100%
8.50%
CS3
45%
122%
9.00%
The company uses the CAPM to estimate its cost of ordinary or common equity. Ron Inc. estimates that its beta would
be 1.0 if it has no debt. The risk-free rate is 3% and the market rate of return on average stock market is 8%.
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