Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Textbook Question
Chapter 14, Problem 14SP
WACC AND OPTIMAL CAPITAL STRUCTURE Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm dots not currently use
Elliott uses the
- a. What is the firm's optimal capital structure, and what would be its WACC at the optimal capital structure?
- b. If Elliott's managers anticipate that the company's business risk will increase in the future, what effect would this likely have on the firm's target capital structure?
- c. If Congress were to dramatically increase the corporate tax rate, what effect would this likely have on Elliott's target capital structure?
- d. Plot a graph of the after-tax cost of debt, the
cost of equity , and the WACC versus (1) - e. the debt/capital ratio and (2) the debt /equity ratio.
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Market Debt-to-Value Ratio (wd)
Market Equity-to-Value Ratio (ws)
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0.0
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weighted average cost of capital (WACC). If
the firm will not have to issue new common study
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firm's WACC calculation. However, if the firm will
I have to issue new common stock, the cost of
new common stock should be used in the firm's
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Barton Industines expects that its target capital
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Diol 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, on the basis of those discussions, has created the following table:
Structure
Market Debt-to-Value Ratio (Wd)
Market Equity-to-Value Ratio (Ws)
Bond Rating
Pre-tax Cost of Debt (rd)
A
0.0
1.0
AA
9.0%
B
0.2
0.8
BBB
10.5%
C
0.5
0.5
BB
11.6%
D
0.6
0.4
C
12.7%
E
0.75
0.25
D
14.0%
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Chapter 14 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 14 - Changes in sales cause changes in profits. Would...Ch. 14 - Would each of the following increase, decrease, or...Ch. 14 - Discuss the following statement: All else equal,...Ch. 14 - Prob. 4QCh. 14 - Prob. 5QCh. 14 - Why do public utilities generally use different...Ch. 14 - Why is EBIT generally considered independent of...Ch. 14 - Is the dept level that maximizes a firms expected...Ch. 14 - If a firm goes from zero dept to successively...Ch. 14 - Prob. 10Q
Ch. 14 - A firm is about to double its assets to serve its...Ch. 14 - BREAK-EVEN ANALYSIS A company's fixed operating...Ch. 14 - OPTIMAL CAPITAL STRUCTURE Terrell Trucking Company...Ch. 14 - Prob. 3PCh. 14 - UNLEVERED BETA Hartman Motor has. 18 million in...Ch. 14 - FINANCIAL LEVERAGE EFFECTS Firms HL and LL are...Ch. 14 - Prob. 6PCh. 14 - Prob. 7PCh. 14 - HAMADA EQUATION Situational Software Co. (SSC) is...Ch. 14 - RECAPITALIZATION Tartan industries currently has...Ch. 14 - BREAKEVEN AND OPERATING LEVERAGE a. Given the...Ch. 14 - RECAPITALIZATION Currently, Forever Flowers Inc....Ch. 14 - BREAKEVEN AND LEVERAGE Wingler Communications...Ch. 14 - FINANCING ALTERNATIVES The Severn Company plans to...Ch. 14 - WACC AND OPTIMAL CAPITAL STRUCTURE Elliott...Ch. 14 - Prob. 1TCLCh. 14 - Exploring the Capital Structures for Four...
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