Suppose the companys actual capital structure is 50 percent

Assignment Help Accounting Basics
Reference no: EM13484182

Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure.

Debt Fraction kike with Financial Distress Costs and Without Agency Costs ke with Financial Distress Costs and Agency Costs

0.00 - 12.00% 12.00%

0.10 4.8% 12.05 12.05

0.30 4.9 12.10 12.20

0.40 5.0 12.20 12.60

0.45 5.2 12.40 13.40

0.50 5.7 12.80 14.80

0.60 7.0 15.00 18.00

a. Based on these data, determine the company's optimal capital structure

(i) with financial distress costs and without agency costs and (ii) withfinancial distress and agency costs.

b. Suppose the company's actual capital structure is 50 percent debt and 50 percent equity. How much higher is ka at this capital structure than at the optimal value of ka with financial distress and agency costs?

c. Is it necessary in practice for the company to know precisely its optimal capital structure? Why?

Reference no: EM13484182

Questions Cloud

Prepare the journal entry to record depreciation expense : presented below is information related to equipment owned by pujols company at december 31 2012.cost9000000accumulated
How should private equity funds consider third-party : how should private equity funds consider third-party transactions in measuring fair
Will the fair value of a plain-vanilla interest rate swap : will the fair value of a plain-vanilla interest rate swap on variable rate debt be affected by statement
Let a0 100 a1 112 and s0 34 dollars is it possible to : let a0 100 a1 112 and s0 34 dollars. is it possible to find an arbitrage opportunity if the forward price of stock
Suppose the companys actual capital structure is 50 percent : piedmont instruments corporation has estimated the following costs of debt and equity capital for various fractions of
If the nominal rate rises to 11 percent and following the : according to the fisher effect if the real interest rate is 3 percent and the nominal interest rate is 8 percent what
If you received 6000 in rental income all of it received : assume you purchased a rental property for 50000 and sold it one year later for 55000 there was no mortgage on the
What is the relationship between a bonds price and its : what is the relationship between a bonds price and its yield to
If the investor buys the bond at the going price and holds : an investor is interested in purchasing a new 20-year government bond carrying a 10 percent annual coupon rate with

Reviews

Write a Review

Accounting Basics Questions & Answers

  Problem regarding quarterly sales forecast

Adams Sporting Goods sells bicycles throughout the southeastern United States. The following data were taken from the most recent quarterly sales forecast:

  Pro-tech software acquired all of the outstanding stock of

pro-tech software acquired all of the outstanding stock of reliable software for 14 million. the book value of

  Accounts receivable to cover probable adjustments

Winkler Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments.

  Discontinue production of subassemblies

Making decision for discontinue production of subassemblies and purchase from an outside supplier.

  Determine the objectivity measurement systems

Determine the objectivity of the two measurement systems for the year under consideration. On the basis of your examination, which of the two systems would you prefer? Explain.

  Amounts of factory labor costs transferred to work in proces

Estimate the amounts of factory labor costs transferred to Work in Process and Factory Overhead for current month. Describe the effects on accounts and financial statements of factory labor costs transferred in(a)

  Describing common implementation issues

What are some common implementation issues with activity-based costing systems? How can they be avoided? Provide at least three examples and explain.

  What is the tax effect of transactions

Jasmine made a $50,000 interest-free loan to her son, Jason, who used the money to retire a mortgage on his personal residence. Jason's only sources of income were a salary of $75,000 and $1,500 interest income on a savings account. The releva..

  Watson uses four units of direct material

Watson uses four units of direct material in each finished unit. The direct material price has been stable and is expected to remain so over the next six months.

  Accounting treatments for parent and subsidiary

Explain the general rules and accounting treatments for the parent and subsidiary, including purchase price allocations; intangible assets, such as goodwill and impairment testing; intercompany transactions

  What is the amount of depletion

In January, 2012, Yoder Corporation purchased a mineral mine for $5,100,000 with removable ore estimated by geological surveys at 2,000,000 tons.

  Compute the work-in-process

Compute the work-in-Process transferred to the finished goods warehouse on April 30 using the following information:

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd