EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 13, Problem 5P
a)
Summary Introduction
To determine: The optimal capital structure of firm in two scenarios.
b)
Summary Introduction
To determine: The difference between weighted cost of capital and optimal capital structure.
c)
Summary Introduction
To determine: The necessity of knowing the optimal capital structure
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Students have asked these similar questions
The activity ratios measure which of the following?
Select one:
O a the efficiency of the company's supply chain
O b. the efficiency with which a company generates sales from its assets
Oc the profitability of the company's activities
Od the production efficiency of a company's fixed assets
If the assumption of financial distress costs is added, then Modigliani and Miller (with taxes) predicts that the optimal capital
structure is 100% debt
Select one:
O True
O False
The financial manager of a firm determines the following schedules of cost of debt and cost of equity for various combinations of debt financing:
Debt/Assets
After-Tax Cost of Debt
Cost of Equity
0
%
4
%
7
%
10
4
7
20
4
7
30
4
9
40
5
10
50
5
12
60
8
13
70
8
15
Find the optimal capital structure (that is, optimal combination of debt and equity financing). Round your answers for the capital structure to the nearest whole number and for the cost of capital to one decimal place.
The optimal capital structure: % debt and % equity with a cost of capital of %
Why does the cost of capital initially decline as the firm substitutes debt for equity financing?
The cost of capital initially declines because the firm cost of debt is than the cost of equity.
Why will the cost of funds eventually rise as the firm becomes more financially leveraged?
As the firm becomes more financially leveraged and riskier, the cost of debt…
Assume that your company is trying to determine its optimal capital structure, which consists only of
debt and common stock. To estimate the cost of debt, the company has produced the following
table:
09.86%
9.56%
Percent Financed
With Debt
10.16%
8.96%
9.26%
0.10
0.20
0.30
0.40
0.50
Percent Financed
With Equity
0.90
0.80
0.70
0.60
0.50
Debt/Equity
Ratio
Now assume that the company's tax rate is 40 percent, that the company uses the CAPM to
estimate its cost of common equity, Ks, that the risk-free rate is 5 percent and the market risk
premium is 6 percent. Finally assume that if it has no debt its WACC would be equal to its cost of
equity which would be equal to 11 percent (you should now be able to determine its "unlevered
beta," bu).
0.10/0.90 0.11
0.20/0.80 0.25
Given this information, determine the firm's cost of capital if it finances with 40 percent debt and 60
percent equity.
0.30/0.70=0.43
0.40/0.600.67
0.50/0.50 = 1.00
Bond
Rating
AA
A
A
BB
B
Before-Tax
Cost of Debt
7.0%
7.2%…
Chapter 13 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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Similar questions
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