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
Q. What is the significance of Working Capital? Meaning of Working Capital: - Working capital management is an significant aspect of financial management. In business money is

What is Cost of Capital Cost of Capital is the rate which should be earned in order to satisfy required rate of return of the firm's investors. It may also be defined as the ra

Performance of Mutual Funds The performance of Mutual Funds can be evaluated by calculating the rate of return earned during the relevant comparison period. The return will inc

Compare diversifiable and nondiversifiable risk. Which do you think is more important to financial managers in business firms? Diversifiable risk is able to be dealt with by of

What are the assumptions of MM(Modigliani Miller) approach?

It is a phrase referring to the tendency of departments to become isolated from one another in a functionally structured company.

What are some of the factors which common stockholders consider while deciding how much, if any, cash dividends they desire from the corporation in which they have invested? Comm

Q. What is Certified Financial Planner? Certified Financial Planner (CFP) - Individuals who are trained to develop and implement financial plans for businesses, individuals and

Weak form level of efficiency This level states that share prices fully reflect information in historic share price movement and patterns (past information/historic information

State about the capital structure of financial risk Frequently the funds supplied to a firm by lenders will change its financial structure and charge for the funds would be bas