Horizon moving quickly to its optimal capital structure

Assignment Help Financial Management

Reference no: EM132063980

Horizon Optical, an internet services provider, is considering changing its capital structure. The firm's beta is 1.25, the current risk-free rate of return is 5.50%, and the market risk premium is 7.50%. Horizon's return on equity was 16.50% and its debt to capital ratio is 10%. The company faces stiff competition and is a possible takeover target, but has significant anti-takeover protection in its corporate charter. The company projects its cost of equity will be 12.65% at its optimal capital structure. Which of the following arguments can be offered for Horizon moving quickly to its optimal capital structure?

I. Market competition

II. Horizon's low equity return differential

III. The takeover activity in the market

A. I only

B. II only

C. I and II only

D. I and III only

E. I, II, and III

Corporation has a current debt to capital ratio of 20%. The company is planning on adding debt as part of its expansion program for the coming year. Which of the following uses a distribution of EBIT to determine the maximum amount of debt a firm can accommodate before reaching a probability constraint of default?

A. The operating income approach

B. The cost of capital approach

C. The differential return approach

D. The comparative leverage approach

Reference no: EM132063980

Questions Cloud

Describe municipal bonds : Describe Municipal bonds, how are they used by government and municipalities, also how do they work for clients accounts.

The firm does not intend to change its debt to equity ratio : The firm does not intend to change its debt to equity ratio when making additional investments.

Would like to reduce its debt ratio to optimal level : Corporation considers itself to be overly leveraged and would like to reduce its debt ratio to an optimal level.

Leverage approach to determining optimal capital structure : Which of the following statements is true concerning the comparative leverage approach to determining an optimal capital structure?

Horizon moving quickly to its optimal capital structure : Which of the following arguments can be offered for Horizon moving quickly to its optimal capital structure?

Privately owned and currently using only equity financing : Corporation is privately owned and currently using only equity financing. how much total debt financing should Corporation use to reach optimal financing mix.

True concerning the optimal capital structure : Which of the following observations is true concerning the optimal capital structure?

Company market value weighted-average cost of capital : Determine its current market value weighted-average cost of capital. What is Company's market value weighted-average cost of capital?

What is the optimal capital structure of the firm : Company is trying to determine its optimal capital structure. Based upon the trade-off theory, what is the optimal capital structure of the firm?

User Account

All Pages