Exam 15: Capital Structure Policy

A firm's excess cash can be readily determined from its balance sheet.

Top management's desire to avoid the scrutiny that comes with higher levels of debt may influence the capital structures of some firms.

The firm's optimal capital structure is the mix of financing sources that

Merrimac Brewing company's total assets equal $18 million. The book value of Merrimac's equity is $6 million. Excess cash is $200,000. The market value of Merrimac's equity is $10 million. It's Debt to Enterprise Value ratio is .5. What is the book value of Merrimac's interest- bearing debt?

Young Enterprises is financed entirely with 3 million shares of common stock selling for $20 a share. Capital of $4 million is needed for this year's capital budget. Additional funds can be raised with new stock (ignore dilution) or with 13% 10-year bonds. Young's tax rate is 40%. a. Calculate the financing plan's EBIT indifference point. b. Does the "indifference point" calculated in question (a) above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.

The enterprise value of the firm is defined as

Conservative balance sheets may be advantageous for companies that have long-term relationships with their customers.

The Times Interest Earned Ratio measures a firm's ability to meet both interest payments and scheduled principal repayments.

Agency costs occur when managers choose the easiest form of financing over the value maximizing capital structure.

Cabot Corp has a debt ratio (debt to assets) of 60%. Management is wondering if its current capital structure is too conservative. Cabot Corp's present EBIT is $4.5 million, and profits available to common shareholders are $2,791,800, with 384,000 shares of common stock outstanding. If the firm were to instead have a debt ratio of 80%, additional interest expense would cause profits available to stockholders to decline to $2,732,400, but only 307,200 common shares would be outstanding. What is the difference in EPS at a debt ratio of 80% versus 60%?

The objective of capital structure management is to maximize the market value of the firm's equity.

Which of the following is NOT a component of a firm's capital structure?

Other things the same, the use of debt financing reduces the firm's total tax bill, resulting in a higher total market value.

At the beginning of the financial crisis of 2008, excessive debt caused serious problems in the ________ industry.

When the impact of taxes is considered, but the impact of financial distress is ignored, the optimal financial structure is

Zybeck Corp. projects operating income of $4 million next year. The firm's income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock at $10 per share. If Zybeck issues common stock this year, what will the firm's return on equity be next year?

When the impact of taxes is considered, as the firm takes on more debt

When equipment is acquired under a capital lease, the tax deduction for depreciation is taken by

Tremont Inc.'s Total Assets =$25 million. The balance sheet shows Accounts payable and accruals totaling $7 million, common stock and retained earnings total $10 million. There is no preferred stock. What is the book value of interest bearing debt?

The inclusion of bankruptcy costs and taxes in firm valuation