Question 1

A firm's capital structure is made up of 200,000 common shares and $1,000,000 debt at 12% interest.The company's tax rate is 50%.An additional $500,000 has to be raised, and the following financing alternatives are available:
Option 1: Common shares: The company can sell additional shares at $10 a share.Hence, 50,000 new shares would have to be issued.
Option 2: Debt: Debt can be issued at 12%, requiring interest payments of $60,000.
Compute EPS as a function of EBIT for both alternatives and derive the break-even point.

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Question 2

In a world with corporate taxes, no personal taxes and no risk of bankruptcy, what is a firm's ideal capital structure?

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Question 3

Explain the concept of M&M's homemade leverage and why it is not equivalent to a firm's debt.

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Question 4

There are two companies, U and L, which are identical in every respect, except that U is financed entirely through common equity and L has $100,000 in debt at an interest rate of 16%.Both companies achieve annual net operating earnings of $45,000.Assume perfect markets and information, with no taxes and no bankruptcy costs.If the market capitalizes firm U at a rate of 10%, and the total market value of L is $500,000, is there an arbitrage opportunity available, and if so, what is the net gain?

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Question 5

Explain the importance of debt in minimizing the agency cost problem between the managers and the shareholders.

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Question 6

Briefly explain the trade-off theory of capital structure.

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Question 7

Compare and contrast the responsibility of the board of directors (BOD)of a solvent Canadian firm and one that is insolvent.

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Question 8

The management of Maritime Fisheries Company has just announced that they will be issuing shares to finance a positive net present value (NPV)project.Briefly discuss the likely impact this action will have on the current share.

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Question 9

If the personal tax rate on dividends (T_D)equals the tax rate on interest income (T_P), A)there is no tax advantage to using debt. B)there is a tax advantage to using debt. C)there is a tax disadvantage to using debt. D)none of the above

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Quiz 21: Capital Structure Decisions

In a world with corporate taxes, no personal taxes and no risk of bankruptcy, what is a firm's ideal capital structure?

Explain the concept of M&M's homemade leverage and why it is not equivalent to a firm's debt.

Explain the importance of debt in minimizing the agency cost problem between the managers and the shareholders.

Briefly explain the trade-off theory of capital structure.

Compare and contrast the responsibility of the board of directors (BOD)of a solvent Canadian firm and one that is insolvent.

The management of Maritime Fisheries Company has just announced that they will be issuing shares to finance a positive net present value (NPV)project.Briefly discuss the likely impact this action will have on the current share.

If the personal tax rate on dividends (T_D) equals the tax rate on interest income (T_P) ,

Quiz 21: Capital Structure Decisions

In a world with corporate taxes, no personal taxes and no risk of bankruptcy, what is a firm's ideal capital structure?

Explain the concept of M&M's homemade leverage and why it is not equivalent to a firm's debt.

Explain the importance of debt in minimizing the agency cost problem between the managers and the shareholders.

Briefly explain the trade-off theory of capital structure.

Compare and contrast the responsibility of the board of directors (BOD)of a solvent Canadian firm and one that is insolvent.

The management of Maritime Fisheries Company has just announced that they will be issuing shares to finance a positive net present value (NPV)project.Briefly discuss the likely impact this action will have on the current share.

If the personal tax rate on dividends (TD) equals the tax rate on interest income (TP) ,

If the personal tax rate on dividends (T_D) equals the tax rate on interest income (T_P) ,