Please help solve and show work.As a firm takes on more debt, its probability of bankruptcy ___ . Other factors held constant, a firm whose earnings are relatively volatile faces a ____ chance of bankruptcy. Therefore, when other factors are held constant, a firm whose earnings are relatively volatile should use ____ debt than a more stable firm. When bankruptcy costs become more important, they ____ the tax benefits of debt. Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm’s unlevered beta is 1.05, and its cost of equity is 12.40%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 12.40%. The risk-free rate of interest (rRFrRF) is 4%, and the market risk premium (RPMRPM) is 8%. Blue Ram’s marginal tax rate is 25%.Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table.D/Cap RatioE/Cap RatioD/E RatioBond RatingBefore-Tax Cost of Debt (rdrd)Levered Beta (b)Cost of Equity (rsrs)WACC0.01.00.00——1.0512.40%12.40%0.20.80.25A8.4% 13.976%12.441%0.40.60.67BBB8.9%1.57516.600% 0.60.41.50BB11.1%2.231 13.734%0.80.2 C14.3%4.20037.600% As a firm takes on more debt, its probability of bankruptcyfaces a. Other factors held constant, a firm whose earnings are relatively volatilechance of bankruptcy. Therefore, when other factors are held constant, a firm whose earnings are relatively volatile should usedebt than a more stable firm. When bankruptcy costs become more important, theythe tax benefits of debt.Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity.The firm's unlevered beta is 1.05, and its cost of equity is 12.40%. Because the firm has no debt in its capital structure, its weighted average cost ofcapital (WACC) also equals 12.40%. The risk-free rate of interest (TRF) is 4%, and the market risk premium (RPM) is 8%. Blue Ram's marginal taxrate is 25%.Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financialinformation that follows to analyze its weighted average cost of capital (WACC). Complete the following table.D/CapRatio0.00.20.40.60.8E/CapRatio1.00.80.60.40.2D/E Ratio0.000.250.671.50▶BondRating-ABBBBBсBefore-Tax Cost ofDebt (ra)8.4%8.9%11.1%14.3%Levered Beta(b)1.051.5752.2314.200Cost of Equity (IS)12.40%13.976%16.600%37.600%WACC12.40%12.441%13.734%

Levered Beta: Levered beta measures the volatility of a company's stock returns relative to the…

As a firm takes on more debt, its probability of bankruptcy _ . Other factors held constant, a firm whose earnings are relatively volatile faces a chance of bankruptcy. Therefore, when other factors are held constant, a firm whose earnings are relatively volatile should use debt than a more stable firm. When bankruptcy costs become more important, they __ the tax benefits of debt. Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm’s unlevered beta is 1.05, and its cost of equity is 12.40%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 12.40%. The risk-free rate of interest (rRFrRF) is 4%, and the market risk premium (RPMRPM) is 8%. Blue Ram’s marginal tax rate is 25%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. D/Cap Ratio E/Cap Ratio D/E Ratio Bond Rating Before-Tax Cost of Debt (rdrd) Levered Beta (b) Cost of Equity (rsrs) WACC 0.0 1.0 0.00 — — 1.05 12.40% 12.40% 0.2 0.8 0.25 A 8.4% 13.976% 12.441% 0.4 0.6 0.67 BBB 8.9% 1.575 16.600% 0.6 0.4 1.50 BB 11.1% 2.231 13.734% 0.8 0.2 C 14.3% 4.200 37.600%

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

D/Cap Ratio	E/Cap Ratio	D/E Ratio	Bond Rating	Before-Tax Cost of Debt (rdrd)	Levered Beta (b)	Cost of Equity (rsrs)	WACC
0.0	1.0	0.00	—	—	1.05	12.40%	12.40%
0.2	0.8	0.25	A	8.4%		13.976%	12.441%
0.4	0.6	0.67	BBB	8.9%	1.575	16.600%
0.6	0.4	1.50	BB	11.1%	2.231		13.734%
0.8	0.2		C	14.3%	4.200	37.600%