Debt to take advantage of low interest rates and tax shield

Assignment Help Financial Management
Reference no: EM131011788

WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- to-Value Ratio (wd) Market Equity-to-Value Ratio (ws) Market Debt- to-Equity Ratio (D/S) Before-Tax Cost of Debt (rd) 0.0 1.0 0.00 7.0% 0.2 0.8 0.25 8.0 0.4 0.6 0.67 10.0 0.6 0.4 1.50 12.0 0.8 0.2 4.00 15.0 F. Pierce uses the CAPM to estimate its cost of common equity, rs. The company estimates that the risk-free rate is 6%, the market risk premium is 5%, and the company's tax rate is 30%. F. Pierce estimates that its beta now (which is "unlevered" since it currently has no debt) is 0.75. Based on this information, what is the firm's optimal capital structure, and what would the weighted average cost of capital be at the optimal capital structure? Do not round intermediate calculations. Round your answers to two decimal places.

Reference no: EM131011788

Questions Cloud

Compare and contrast the rights and obligations of racer : Racer contracted in writing to drive Owner's one-of-a-kind, specially designed championship race car in the Miami 500 Race on July 15 for a fee of $2500. Compare and contrast the rights and obligations of Racer and Owner under the contract as of J..
Write an equation that represents the number of points : Write an equation that represents the number of points, p if f represents the number of shots made from the free throw line, and if h represents the number of shots made the number of shots made from half court line in words.
Calcium level in pregnant women in rural guatemala : The level of calcium in the blood in healthy young adults varies with mean about 9.5 milligrams per deciliter and standard deviation about σ = 0.4. A clinic in rural Guatemala measures the blood calcium level of 160 healthy pregnant women at their..
Determine the annual payment : Determine the annual payment on a $15,000 loan that is to be amortized over a four-year period and carries a 10 percent interest rate. Prepare a loan amortization schedule for this loan.
Debt to take advantage of low interest rates and tax shield : WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but would like to add some debt to take advantage of low interest rates and the tax shie..
Explain the characteristics of experimental design : Explain the characteristics of experimental design. If you were a Quality Manager, how would you use the concepts of vertical and horizontal balancing to ensure a sound experiment?
Attitudes toward school : The Survey of Study Habits and Attitudes (SSHA) is a  psychological  test that measures the motivation, attitude toward school, and study habits of students. Scores range from 0 to 200.
Experiences influence your personal philosophy of education : Which areas in your life or parts of your past could be problematic for you as a beginning teacher? (my answer: I had spinal surgery two years ago and im still in pain. The doctors don't know what to do stop my pain. Stress and over working builds..
Make long term investment decisions for sustainability : Businesses must make long term investment decisions for sustainability. Critical questions such as which assets to invest in and at what cost to the organization are crucial the future viability of the business. What is the role and importance of mak..

Reviews

Write a Review

Financial Management Questions & Answers

  Used to estimate the cost of equity capital

If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to

  What cash flow must the investment

You are negotiating to make a 7-year loan of $27,500 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end..

  Fixed costs-variable costs

A company has $7.30 per unit variable costs and $5 per unit fixed costs at a volume of 50,000 units. If the company marks up total costs by 0.51, what price should be charged if 70,000 units are expected to be sold?

  A 16 debenture of r5 000 is redeemable at a premium of 10

a 16 debenture of r5 000 is redeemable at a premium of 10 after 5 years. the fair rate of return on similar debentures

  Nominal and effective costs of trade credit

Grunewald Industries sells on terms of 3/10, net 50. Gross sales last year were $4,972,000, and accounts receivable averaged $488,000. Half of Grunewald's customers paid on the 10th day and took discounts. What are the nominal and effective costs of ..

  Federal aviation administration

Bola has accumulated $50,000 in her thrift savings plan at her job at the Federal Aviation Administration. The government puts in 1% of her pay and matches up to another 4% if she puts in 5% out of her pay. Bola earns $90,000 a year and plans to add ..

  Describe what major factors should the company be aware

What major factors should the company be aware of as it evaluates possible investment projects in the future? Would you be interested in investing in this company? Why or why not? Are there additional factors that aren't a part of this case that you..

  Assume the total cost of a college education

Assume the total cost of a college education will be $200,000 when your child enters college in 16 years. You presently have $73,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college ed..

  A treasury bond with a maturity

A Treasury bond with a maturity of 25 years has an ask price quoted at 139:31. The coupon rate is 4.9 percent, paid semi-annually. What is the yield to maturity of this bond? (Do not round intermediate calculations. Round your answer to 2 decimal pla..

  Earnings and dividends are declining at the constant rate

Martell Mining Company's ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 8% pe..

  Concept would be appropriate for a sole proprietorship

What business concept would be appropriate for a sole proprietorship, a corporation, and a limited liability company, respectively? If you were opening your dream business, what structure would you select? Why?

  What is the required percentage rate of return of equity

Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5.9% bonds outstanding. Assume that (1) all of the MM assumptions are met, (2) there are no corporate or personal taxes, (3) EBIT is $2.1 million, ..

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