Capital structure theory, Financial Management

Assignment Help:

Capital structure theory:

Use the following information to answer the questions:

Case I: Capital structure theory (no tax)

Case II: Capital structure theory (corporate tax)

WACC : 10%

Debt-to-firm value(D/V) : 50%

Cost of debt : 6%

EBIT : $40 million

Tax rate : 50%

Unlevered cost of capital : 10%

a. In Case I, when the debt-to-firm value decreases to 40%, figure out the new WACC. And does the cost of equity increase or decrease?

b. In Case II, when the debt is zero, figure out the firm's value based on the assumption that EBIT is constant forever. Again, when the debt increases to $30mil., figure out the firm's value?

c. In Case II, when the debt increases to $30mil., does the WACC increase or decrease or stay the same? And does the cost of equity increase or decrease?


Related Discussions:- Capital structure theory

Enumerate the internal development of any business, Enumerate the Internal ...

Enumerate the Internal development of any business or 'organic growth' Business grows using its own internal resources. - Reduces risk of the high cost of integrating cultur

None, Reacher Technology has consulted with investment bankers and determin...

Reacher Technology has consulted with investment bankers and determined the intere Reacher Technology has consulted with investment bankers and determined the interest rate it woul

Explain the aspects of financing decision, Explain the aspects of financing...

Explain the aspects of financing decision The financing decision covers two interrelated aspects: (1) capital structure theory (2) capital structure decision.

Procurement, What is the explanation for leaset cost selection

What is the explanation for leaset cost selection

Define how the market determine the fair value of a bond, How does the mark...

How does the market determine the fair value of a bond? The bond’s fair value is the present value of the bond's coupon interest payments plus the present value of the face value

Function of the investment decision, Q. Function of the Investment decision...

Q. Function of the Investment decision? Investment decision related of the selection of the fixed assets. the assets can be acquired fall into two board groups i) long terms

Budget setting styles, Advantages and disadvantage of pacipatory style of b...

Advantages and disadvantage of pacipatory style of budgeting

Describe the concept of block of assets, Describe the Concept of Block of A...

Describe the Concept of Block of Assets? (a) Comment on the techniques of Risk Analysis commonly employed in Capital Budgeting. (b) Define clearly the concept of block of as

How amount of financing affecting cost of capital, Q. How Amount of financi...

Q. How Amount of financing affecting cost of capital? Amount of financing as the financing require of the firm become larger , the weighted cost of capital increased several re

Need for simulation, Need for Simulation If the mathematical model set...

Need for Simulation If the mathematical model set up could always be optimized by the analytical approach, then, there would be no need for simulation. Only when interrelation

Write Your Message!

Captcha
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