Capital structure theory, Financial Management

Capital structure theory:

Use the following information to answer the questions:

Case I: Capital structure theory (no tax)

Case II: Capital structure theory (corporate tax)

WACC : 10%

Debt-to-firm value(D/V) : 50%

Cost of debt : 6%

EBIT : $40 million

Tax rate : 50%

Unlevered cost of capital : 10%

a. In Case I, when the debt-to-firm value decreases to 40%, figure out the new WACC. And does the cost of equity increase or decrease?

b. In Case II, when the debt is zero, figure out the firm's value based on the assumption that EBIT is constant forever. Again, when the debt increases to $30mil., figure out the firm's value?

c. In Case II, when the debt increases to $30mil., does the WACC increase or decrease or stay the same? And does the cost of equity increase or decrease?

Posted Date: 2/12/2013 1:25:28 AM | Location : United States

Related Discussions:- Capital structure theory, Assignment Help, Ask Question on Capital structure theory, Get Answer, Expert's Help, Capital structure theory Discussions

Write discussion on Capital structure theory
Your posts are moderated
Related Questions
A firm has net working capital of -$800. Long-term debt is $15,400, total assets are $24,800 and fixed assets are $19,100. What is the amount of the total liabilities.

Q. Show the Supposition of MM Hypothesis? Supposition of MM Hypothesis:- (i) There are ideal capital markets. (ii) Investors act rationally. (iii) Information regardin

Determine the meaning of Reportable segments Reportable  segments  are  operating  segments  or  aggregations  of  operating  segments  which meet specified criteria(core princ

If normal operating revenues are inadequate to repay the debt, liquidation of collateral may be necessary. Corporate bonds can be either secured or unsecured by c

Public Financial Statements of a Company The final exercise is the valuation of a publicly held company's equity. You must base your valuation on the company's public financia

Fund Managers or the Asset Management Company (amc) The role of fund managers is highly significant in the mutual fund operations. So far, this role is being played by the Mutu

Q. Show the Accounting Profit Criteria? Accounting Profit Criteria: - Under accounting profit criteria there is merely one method for making capital expenditure decisions. This

Your construction company is evaluating the proposed acquisition of a new earthmover. A consulting company you hired developed the following analysis last year at a cost to you of

Cash management is about managing excess cash also. The response of management must depend on whether the surplus is large and how long it is likely to exist. If the balance is

Treasury Bills, popularly known as T-bills, are issued in India by the RBI on behalf of the Government of India. T-bills are short-term securities with a maturity of 91