Question 1

Uptown Construction is comparing two different capital structures.Plan I would result in 16,000 shares of stock and $160,000 in debt.Plan II would result in 18,000 shares of stock and $110,000 in debt.The interest rate on the debt is 9 percent.Ignoring taxes,EPS will be identical for Plans I and II when EBIT equals which one of the following?

Accepted Answer

The answer of Uptown Construction is comparing two different capital...

Question 2

Delta Mowers has a debt-equity ratio of .6.Its WACC is 11.8 percent,and its cost of debt is 7.7 percent.There is no corporate tax.What is the firm's cost of equity capital?

Accepted Answer

The answer of Delta Mowers has a debt-equity ratio of...

Question 3

Sand Mountain Resort has a tax rate of 32 percent.Its total interest payment for the year just ended was $41,000.What is the interest tax shield for the year?

Accepted Answer

The interest tax shield is calculated as the product of the tax rate and the amount of interest paid.

Interest tax shield = Tax rate x Interest payment 
= 0.32 x $41,000 
= $13,120

Therefore, the best choice is B) $13,120, as it is the correct calculation of the interest tax shield for Sand Mountain Resort.

Question 4

Bruno's is considering changing from its current all-equity capital structure to 30 percent debt.There are currently 7,500 shares outstanding at a price per share of $39.EBIT is expected to remain constant at $23,000.The interest rate on new debt is 7.5 percent and there are no taxes.Tracie owns $12,675 worth of stock in the company.The firm has a 100 percent payout.What would Tracie's cash flow be under the new capital structure assuming that she keeps all of her shares?

Accepted Answer

The answer of Bruno's is considering changing from its current...

Question 5

Marcos & Sons has no debt.Its current total value is $13 million.What will the company's value be if it sells $5 million in debt and has a tax rate of 35 percent? Assume all debt proceeds are used to repurchase equity.

Accepted Answer

The answer of Marcos & Sons has no debt.Its current...

Question 6

Glass Growers has a cost of capital of 11.1 percent.The company is considering converting to a debt-equity ratio of .46.The interest rate on debt is7.3 percent.What would be the company&#8217;s new cost of equity? Ignore taxes.

Accepted Answer

The cost of equity can be calculated using the formula: Cost of Equity = Cost of Capital + (Cost of Capital - Cost of Debt) * Debt-Equity Ratio. Plugging in the values: 11.1% + (11.1% - 7.3%) * 0.46 = 12.85%.

Question 7

The Piano Movers can borrow at 7.8 percent.The firm currently has no debt,and the cost of equity is 15 percent.The current value of the firm is $680,000.What will the value be if the firm borrows $140,000 and uses the proceeds to repurchase shares? The corporate tax rate is 35 percent.

Accepted Answer

The answer of The Piano Movers can borrow at 7.8...

Question 8

Triangle Enterprises has no debt but can borrow at 8 percent.The firm's WACC is currently 13.2 percent,and there is no corporate tax.If the firm converts to 30 percent debt,what will its cost of equity be?

Accepted Answer

The answer of Triangle Enterprises has no debt but can...

Question 9

Gabe's Market is comparing two different capital structures.Plan I would result in 15,000 shares of stock and $210,000 in debt.Plan II would result in 13,000 shares of stock and $252,000 in debt.The interest rate on the debt is 8 percent.Ignoring taxes,compare both of these plans to an all-equity plan assuming that EBIT will be $52,000.The all-equity plan would result in 25,000 shares of stock outstanding.Of the three plans,the firm will have the highest EPS with _____ and the lowest EPS with ____.

Accepted Answer

To compare the plans, we need to calculate the earnings per share (EPS) for each option.
- Plan I: The total financing is $225,000 ($210,000 in debt + $15,000 in equity). The interest expense is $16,800 ($210,000 x 8%), leaving $35,200 in earnings before taxes (EBT). After deducting taxes, assuming a 40% tax rate, the earnings available to common stockholders is $21,120. EPS = $21,120 / 15,000 = $1.408.
- Plan II: The total financing is $265,000 ($252,000 in debt + $13,000 in equity). The interest expense is $20,160 ($252,000 x 8%), leaving $31,840 in EBT. After deducting taxes, the earnings available to common stockholders is $19,104. EPS = $19,104 / 13,000 = $1.470.
- All-equity plan: The total financing is $0 in debt and $375,000 ($15,000 x 25,000) in equity. The earnings available to common stockholders is $31,200 ($52,000 x 0.6, assuming a 40% tax rate). EPS = $31,200 / 25,000 = $1.248.

Therefore, Plan II has the highest EPS of $1.470, followed by Plan I with an EPS of $1.408, and the all-equity plan with the lowest EPS of $1.248. The correct answer is option B.

Quiz 13: Leverage and Capital Structure

Delta Mowers has a debt-equity ratio of .6.Its WACC is 11.8 percent,and its cost of debt is 7.7 percent.There is no corporate tax.What is the firm's cost of equity capital?

Sand Mountain Resort has a tax rate of 32 percent.Its total interest payment for the year just ended was $41,000.What is the interest tax shield for the year?

Marcos & Sons has no debt.Its current total value is $13 million.What will the company's value be if it sells $5 million in debt and has a tax rate of 35 percent? Assume all debt proceeds are used to repurchase equity.

Glass Growers has a cost of capital of 11.1 percent.The company is considering converting to a debt-equity ratio of .46.The interest rate on debt is7.3 percent.What would be the company’s new cost of equity? Ignore taxes.

The Piano Movers can borrow at 7.8 percent.The firm currently has no debt,and the cost of equity is 15 percent.The current value of the firm is $680,000.What will the value be if the firm borrows $140,000 and uses the proceeds to repurchase shares? The corporate tax rate is 35 percent.

Triangle Enterprises has no debt but can borrow at 8 percent.The firm's WACC is currently 13.2 percent,and there is no corporate tax.If the firm converts to 30 percent debt,what will its cost of equity be?