User Account

All Pages

Determine optimal capital structure

Assignment Help Finance Basics
Reference no: EM133111448

Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future.  To estimate how much its debt would cost at different debt levels, the company's treasury staff has consulted with investment bankers and, based on those discussions, has created the following table:

 % debt financed

% equity financed

D/E Ratio (D/E)

Bond Rating

Before-tax cost of debt (rd)

0.00

1.00

0.00

A

7.0%

0.20

0.80

0.25

BBB

8.0%

0.40

0.60

0.67

BB

10.0%

0.60

0.40

1.5

C

12.0%

0.80

0.20

4.0

D

15.0%

Elliott uses the CAPM to estimate its cost of common stock, rs. The company estimates that the risk-free rate is 5%, the market risk premium is 6% and its tax rate is 25%. Elliott currently has 20% debt and a beta of 1.425. Based on this information, what is the firm's optimal capital structure?

Reference no: EM133111448

Questions Cloud

Discount rate being used to value the stock : A stock has just paid a dividend of $2.20. The next dividend on the stock will be paid one year from today and each subsequent dividend will be old one year aft
What is the profitability index for project : A firm is considering a project that has an upfront cost of $250,000. The project is expected to generate zero cash flow in the first three years. Beginning in
Difference between the npv of a financial model : Suppose we compare the difference between the NPV of a financial model in which the means are entered for all input random variables and the NPV of a financial
Which rules of professional conduct should ryan consider : Which rules of professional conduct should Ryan consider in deciding on a course of action? Explain. What are Ryan's ethical obligations in this matter
Determine optimal capital structure : Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use prefe
What is the implied volatility of the call option : Stock ABC has a current price of $25 and does not pay any dividends. An options trader, an alumnus of FIN 4021 class, pays $2 for a European call option written
Did they perform the steps accurately : Did they perform the steps accurately? If not, specifically state the nature of the problem and follow up on it to the extent possible with the information give
Write two a brief paragraph citing : Write two a brief paragraph citing the most current events and their impact to the Apple, Inc. company and whether to invest in the company or you would change
What is a cash budget : What is a cash budget, and how can this statement be used to help reduce the amount of cash that a firm needs to carry?

Reviews

Write a Review

Finance Basics Questions & Answers

  Calculate the npv and the irr

Davis Corporation must select between a gas-powered and an electric powered fork-lift truck for moving materials in its factory. Since both forklifts perform same function, firmwill select only one.

  What is the estimated value ofone share of stock

1.PA stock is selling for $36.60 a share. One $35 call is valued at $1.92 andone $35 put is valued at $.49. What is the value of five call optioncontracts? 2. A 1-month $25 call option on BRU stock is prices at $3.22. What is theestimated value of on..

  Equivalent annual cash flow associated with machine

Suppose the relevant occ is 12% and the tax rate is 30%. What is the equivalent annual cash flow (EACF) associated with this machine?

  How much at end of each 6 month for 5 years

How much at end of each 6 month for 5 years at j2 = 12% would you have to save in order to receive $2000 at the end of each 6

  Privately owned companies than publicly traded

Why is it more difficult to value privately owned companies than publicly traded? Give specific examples.

  Which option has the highest present value

Great news! You've just won a lottery. Bad news! You have to make a decision.

  What would be the effective annual percentage cost of funds

Affleck Inc.'s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and the firm's ow..

  What is the effective annual rate of the cheaper card

The second credit card charges 16.25 percent APR and compounds weekly. What is the effective annual rate of the cheaper card?

  Williams company purchased a machine costing

Williams Company purchased a machine costing $44,800 and is depreciating it over a 10-year estimated useful life with a residual value of $4,800. At the beginning of the eighth year, a major overhaul on it was completed at a cost of $9,800, and the t..

  Provide some examples of sources of short-term credit

Provide some examples of sources of short-term credit? How can use these examples to evaluate the cost of financing as a key determinant

  The current federal income tax system

Decides to completely overhaul the current federal income tax system

  What is cross-exchange rate between the yen and the shekel

A currency trader observes that in the spot exchange marker, 1 U.S. dollar can be exchanged for 3.50 Israeli shekels or for 104.00 Japanese yen. What is the cross-exchange rate between the yen and the shekel, how many yen would you receive for eve..

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!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

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