Homework Answers
Considering that there are no other types of financial claims in the capital structure such as preferred equity etc, we can safely assume that the risk in firm shall step from risk from debt and equity. Now if the change in capital structure increases risk of equity as well as for the debt, then the total risk for the firm is increased. However this may not always happen because the correlation between debt and equity may decrease. This decrease in correlation may lead to the firm being less risky.
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Q16.27 If a change in capital structure increases the risk of the firm's equity and the...
Globex Corp. has a capital structure that consists of 40% debt and 60% equity. The firm's...
Globex Corp. has a capital structure that consists of 40% debt and 60% equity. The firm's current beta is 1.10, but management wants to understand Globex Corp.'s market risk without the effect of leverage. If Globex Corp. has a 40% tax rate, what is its unlevered beta? 0.91 0.75 0.79 0.71 Now consider the case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 6%,...
Globex Corp. has a capital structure that consists of 35% debt and 65% equity. The firm's...
Globex Corp. has a capital structure that consists of 35% debt and 65% equity. The firm's current beta is 1.10, but management wants to understand Globex Corp's market risk without the effect of leverage. If Globex Corp. has a 45% tax rate, what is its unlevered beta? 0.68 0.77 0.85 0.98 Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before tax cost of debt is...
Which one of the following is the equity risk related to a firm's capital structure policy?...
Which one of the following is the equity risk related to a firm's capital structure policy? Ο Ο extrinsic Ο business Ο financial Ο systematic Ο market
Why focus on the optimal capital structure? A company's capital structure decisions address the ways a...
Why focus on the optimal capital structure? A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock and common equity capital) and is often presented as a percentage of the type of financing used As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure Which of the following statements regarding a firm's optimal capital...
Hamada equation Original % debt in capital structure, Wd Original % common equity in capital structure,...
Hamada equation Original % debt in capital structure, Wd Original % common equity in capital structure, wc Risk-free rate, IRF Market risk premium, RPM Tax rate, T Firm's cost of equity, rs 35.00% 65.00% 3.00% 5.00% 40.00% 16.00% Formulas Calculation of firm's current beta: Firm's current beta, b #N/A Calculation of firm's unlevered beta: Firm's unlevered beta, bu #N/A New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New 50.00% 50.00%...
Hamada equation Original % debt in capital structure, Wd Original % common equity in capital structure,...
Hamada equation Original % debt in capital structure, Wd Original % common equity in capital structure, wc Risk-free rate, IRE Market risk premium, RPM Tax rate, T Firm's cost of equity, rs 20.00% 80.00% 6.00% 7.00% 40.00% 16.00% Formulas Calculation of firm's current beta: Firm's current beta, bL #N/A Calculation of firm's unlevered beta: Firm's unlevered beta, bu #N/A New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New 50.00% 50.00%...
U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current...
U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 8%, and its tax rate is 35%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk premium on the market is 7.5%. U.S. Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase...
Terms Descriptions The level and nature of risk attributable to a firm's activities and operation...
Terms Descriptions The level and nature of risk attributable to a firm's activities and operations, and ignoring the risks associated with the firm's capital structure The situation in which managers have different, and usually better, information about their firm's past, current, and future conditions and prospects, compared to outsiders, such as external investors, creditors, suppliers, and customers A firm's use of relatively high fixed, as opposed to variable, operating costs, such as capital-intensive productive processes instead of labor-intensive methods This...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if...
Globex Corp. has a capital structure that consists of 40% debt and 60% equity. The firm's current beta is 1.10, but management wants to understand Globex Corp.'s market risk without the effect of leverage. If Globex Corp. has a 40% tax rate, what is its unlevered beta? 0.91 0.75 0.79 0.71 Now consider the case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 6%,...
Globex Corp. has a capital structure that consists of 35% debt and 65% equity. The firm's current beta is 1.10, but management wants to understand Globex Corp's market risk without the effect of leverage. If Globex Corp. has a 45% tax rate, what is its unlevered beta? 0.68 0.77 0.85 0.98 Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before tax cost of debt is...
Which one of the following is the equity risk related to a firm's capital structure policy? Ο Ο extrinsic Ο business Ο financial Ο systematic Ο market
Why focus on the optimal capital structure? A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock and common equity capital) and is often presented as a percentage of the type of financing used As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure Which of the following statements regarding a firm's optimal capital...
Hamada equation Original % debt in capital structure, Wd Original % common equity in capital structure, wc Risk-free rate, IRF Market risk premium, RPM Tax rate, T Firm's cost of equity, rs 35.00% 65.00% 3.00% 5.00% 40.00% 16.00% Formulas Calculation of firm's current beta: Firm's current beta, b #N/A Calculation of firm's unlevered beta: Firm's unlevered beta, bu #N/A New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New 50.00% 50.00%...
Hamada equation Original % debt in capital structure, Wd Original % common equity in capital structure, wc Risk-free rate, IRE Market risk premium, RPM Tax rate, T Firm's cost of equity, rs 20.00% 80.00% 6.00% 7.00% 40.00% 16.00% Formulas Calculation of firm's current beta: Firm's current beta, bL #N/A Calculation of firm's unlevered beta: Firm's unlevered beta, bu #N/A New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New 50.00% 50.00%...
U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 8%, and its tax rate is 35%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk premium on the market is 7.5%. U.S. Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase...
Terms Descriptions The level and nature of risk attributable to a firm's activities and operations, and ignoring the risks associated with the firm's capital structure The situation in which managers have different, and usually better, information about their firm's past, current, and future conditions and prospects, compared to outsiders, such as external investors, creditors, suppliers, and customers A firm's use of relatively high fixed, as opposed to variable, operating costs, such as capital-intensive productive processes instead of labor-intensive methods This...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if...
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