Since interest payments are fully deductible for tax purposes should a firm’s capital structure be all debt financed? Why & why not?
No even though debt provides tax benefits in the form of interest tax deductible but it raises other costs such as financial distress, bankruptcy and litigation costs. So the optimal capital structure is one where tax shields outweight the costs
Since interest payments are fully deductible for tax purposes should a firm’s capital structure be all...
As per the capital structure theories, the companies can benefit by having debt since the interest expense is deductible for tax purposes, creating an interest tax shield. The interest tax shield, on the other hand, increases in value the higher the coupon rate on the debt and the higher the tax rate. Ignoring financial distress costs, Why or Why not the company then choose to pay as high a coupon rate as possible?
if bankruptcy were costless and there were no information asymmetry, but interest payments are tax-deductible, what is the weighted average cost of capital?
if corporate and personal taxes exist, and interest payments are tax-deductible for corporations, would firms take on as much debt as possible?
Please answer both. Thank you. Vpe Rare Minerals and Metals Inc's capital structure is briefly described below. Compute the company's weighted average cost of capital ("WACC). The company's marginal income tax rate is 25%. Calculate to 4 decimal places. Capital Capital Structure Weights Pre-Tax Cost Bonds 0.35 7.80% Preferred Stock 0.15 11.75% Common Stock 0.50 25.00% 16.57% 16.95% 16,31% 15.12% Question 10 8.55 pts If corporate income tax rates decrease, this change would tend to make a company's weighted average...
Flavortech Inc. expects EBIT of $2,000,000 for the coming year. The firm’s capital structure consists of 40 percent debt and 60 percent equity, and its marginal tax rate is 40 percent. The company pays a 10 percent interest rate on its $5,000,000 of long-term debt. One million shares of common stock are outstanding. In its next capital budgeting cycle, the firm expects to fund one large positive NPV project costing $1,200,000, and it will fund this project in accordance with...
if transactions cost are zero, there is no information asymmetry or personal taxes and bankruptcy is cost less, but corporate taxes exist and interest payments are tax-deductible, what is the optimal amount of debt to have?
Aaron Athletics is trying to determine its optimal capital structure. The company’s capital structure consists of debt and common equity. In order to estimate the cost of capital at various debt levels the company has constructed the following table: Percent financed with debt (wD) Percent financed with equity (ws) Before tax cost of debt 0.10 0.90 7.0% 0.20 0.80 7.2% 0.30 0.70 8.0% 0.40 0.60 8.8% 0.50 0.50 9.6% The company uses the CAPM to estimate its cost of equity,...
A firm’s capital structure is the particular distribution of debt and equity that makes up the finances of a company. a) What does Modigliani-Miller Proposition I (MM I) suggest regarding the choice between debt and equity? b) Modigliani-Miller Proposition II (MM II), proposes that the cost of equity increases dramatically with high levels of debt. Explain why this occurs.
An all-equity firm has 250,000 shares outstanding. The firm’s assets will generate an expected EBIT of $2,000,000 per year (beginning one year from today) in perpetuity. The firm will make no new capital or working capital investments and all assets are fully depreciated. The assets have a beta of 1.5, therisk-free rate is 5%, and the market risk premium is 5%. The financial analysts at the firm have estimated the optimal capital structure to be wd= 40%; we= 60% (or,...
. a) Vita plc has currently no debt in its capital structure, and it is valued at £250 million. The return on the unlevered equity is 15%. The company has decided to modify its capital structure to enjoy the tax benefits of debt, by issuing £50 million of perpetual debt and using the proceeds to repurchase equity. The company has been told that any borrowings made by them will attract a rate of 7%. The tax rate is 35%. i)...