Discuss the capital structure of the firm

Assignment Help Finance Basics

Reference no: EM1312305

Discuss the capital structure of the firm.

A firm has no outstanding debt and a total market value of $200,000. Earnings before interest and taxes (EBIT) are projected to be $25,000 if economic conditions are normal. If there is a strong expansion, EBIT is expected to increase to $35,000, and if there is a recession the firm EBIT is expected to decline to $10,000. The firm is considering a $70,000 debt issue with a 6 percent interest rate, where the proceeds will be used to repurchase shares of stock. There are currently 4,000 shares outstanding. Ignore taxes.

What conclusions can you draw from this example regarding the use of debt (financial leverage) in a firm capital structure?

Reference no: EM1312305

Questions Cloud

Find out the pricing strategy to increase revenues : In each of the cases listed below determine what this consumer needs to do (in terms of purchasing X and Y) to maximizes their utility.

Evaluate surplus relief generated : Evaluate the surplus relief generated from the reinsurance transaction and RST Company had the following account balances

Stereo systems cer bought from stereo manufacturer : CER defaults on its loan payments to Bank One. Can Bank One attach the 100 stereo systems CER bought from Stereo Manufacturer.

The rate of heat transfer passing from the boiling water : If the far end of the iron rod is in an ice bath at 0°C, find the rate of heat transfer passing from the boiling water to the ice bath. Suppose there is no heat loss to the surrounding air.

Discuss the capital structure of the firm : Discuss the capital structure of the firm and What conclusions can you draw from this example regarding the use of debt

Basics of biostatistics. : While discussing their findings, authors have ignored a main threat to the validity of their estimates of the exposure. Explain and discuss this error.

Fail to make your payments to tv land : If you fail to make your payments to TV Land, do they have a claim to your Calculate. Does TV Land or Calculate Land have to file a financing statement.

Identify the amounts of labor : Find the following: First solve this problem using an Excel spreadsheet approach and then do the problem using the optimization procedure; compare the answers for the two methods.

Make an operating budget : Purpose a cash Budget for the first two quarters and make an operating budget for the first and second quarters of operations of Terry's Equipment Center.

User Account

All Pages